TIBCO Software Inc. F2Q08 (Qtr End 06/01/08) Earnings Call Transcript

TIBCO Software Inc. (TIBX)

F2Q08 Earnings Call

June 26, 2008 4:30 pm ET

Executives

Vivek Ranadivé – Chairman and Chief Executive Officer

Murray Rode – Executive Vice President & Chief Financial Officer

Analysts

John DiFucci – JP Morgan

Tim Klasell – Thomas Weisel

Derek Bingham – Goldman Sachs

Kash Rangan - Merrill Lynch

Nabil Elsheshai - Pacific Crest Securities

Katherine Egbert - Jefferies & Co.

Presentation

Operator

Welcome to TIBCO’s second quarter 2008 conference call. (Operator Instructions)

The following conference call includes forward-looking statements which represent TIBCO Software’s outlook and guidance only as of today and which are subject to risks and uncertainties. These forward-looking statements include, but are not limited to, forecasts of revenues, operating margins, operating expenses, outstanding shares, and earnings per share for future periods.

Our actual results could differ materially from those projected in such forward-looking statements. Additional information regarding the factors that could cause actual results to differ materially are discussed in the Risk Factors section of TIBCO’s most recent reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission. TIBCO assumes no obligation to update the forward-looking statements included in this call whether as a result of new development or otherwise.

This conference call also includes certain financial information that has not been prepared in accordance with generally accepted accounting principles as we believe that such information is useful for understanding our financial condition and results of operations. For presentation of the most directly comparable financial measures calculated in accordance with GAAP and a reconciliation of the differences between the non-GAAP and GAAP financial information, please see our website at www.tibco.com.

The participants on the call are Vivek Ranadivé, TIBCO’s Chairman and CEO, and EVP & Chief Financial Officer, Murray Rode.

I would now like to turn the call over to Vivek.

Vivek Ranadivé

We appreciate you joining us on our Q2 Earnings Call. I am traveling on business overseas this week while Murray joins us from Palo Alto, so please forgive any moments of pause you might notice during the Q&A Session.

On today’s call I will briefly review our Q2 performance and our broader outlook going forward. Let me start with our Q2 performance.

Total revenues were $150.0 million, resulting in year-over-year growth of 15%. License revenues were $57.7 million, up 5% on a year-over-year basis and fully-taxed non-GAAP earnings per share for the quarter were $0.07 versus $0.07 Q2 a year ago. Year-to-date cash flow from operations exceeds $92.0 million. We completed 91 deals of $100,000 or greater in license versus 73 in the year-ago period.

Customer examples in the quarter include: Arcos Dorados, McDonalds of Latin America, that is; Boehringer Ingelheim; CargoSmart Limited; E. & J. Gallo Winery; Ingram Micro; Sanofi-aventis; Santos; Telecom Italia; TrueCredit; and Vodafone of The Netherlands.

Positive developments this quarter included our continued traction and ability to close significant deals in core vertical markets such as financial services, insurance, life sciences, and teleco, and a strong performance from our European division where total revenues rose 24% year-over-year.

As we shared in our preliminary results announcement earlier this month, we fell short of our goals this quarter primarily due to underperformance in the Americas. This shortfall was largely attributable to a handful of deals failing to materialize during the last week of our quarter. Upon review, these deal slips were mostly caused by factors specific to each situation versus a single overriding trend. In all cases, competition was not a factor and we continue to pursue these deals.

Turning to our forward-looking view, I will make a few comments on our broader outlook. While there are concerning economic indicators in the market today, we believe adamantly that there is opportunity to be captured for TIBCO. The ways in which our customers are using our technology are usually core and critical to their everyday operations. Our platform is unique in both its ability to cut costs and provide differentiation through superior agility and customer service, value that is always in demand in both good times and bad.

Retail banks, global telecos, insurance providers, and others are competing intensely with one another everyday, trying to expand support across more channels, acquire new customers, and optimize what and how much they sell each and every customer. The ability of infrastructure software to enable more flexible and dynamic applications, as well as create and compose entirely new types of applications and services, all with better cost of ownership, makes infrastructure software and important, necessary purchase.

We have demonstrated in recent quarters that customers will continue to spend on these offerings and see strategic value in what we provide. Given this, we believe that there is a void in the market that only TIBCO can fill. We will proceed cautiously in the second half of our year, conscious of the pitfalls of a weak economic environment, but confident in the value we provide. We will continue to invest in expanding our sales capacity to meet customer demand while limiting other expenses across the organization.

An expanded sales force will not only help capture the opportunity available to us, but also to help smooth out our business quarter to quarter by generating greater pipeline coverage.

Now, I will turn it over to Murray to provide some additional details on the quarter’s performance and outlook.

Murray Rode

I will first provide some additional details on our performance in Q2 and then update our outlook for Q3 and the fiscal year. I will review our financials on both a GAAP and a non-GAAP basis, a full reconciliation of which was included with our press release along with an explanation of our non-GAAP measures.

Please note the results I will discuss here are better than the preliminary results we previously announced. Some key data on our second quarter are as follows: Total revenue was $150.0 million, up 15% year-over-year; license revenue was $57.7 million, up 5% year-over-year; services and maintenance revenue with $92.3 million, up 22% year-over-year.

Non-GAAP gross margin was 73%, roughly in line with last year; non-GAAP operating income was $17.5 million resulting in an operating margin of approximately 12%, versus 14% a year ago; non-GAAP EPS was $0.07 versus $0.07 a year ago; and the non-GAAP tax rate for the quarter was 33%, which is one percent below Q1 and a pro forma rate we expect to maintain for the remainder of the year.

Deferred revenue was $154.0 million, including both long and short-term components. This is up about 43% from Q2 a year ago. DSOs came in at 68 days, down sequentially from Q1 and down 11 days year-over-year.

We had cash flow from operations of approximately $32.1 million, which compares with $10.6 million last Q2. This brings year-to-date cash flow to $92.3 million versus $52.6 million for the year-ago period. We ended the quarter with approximately $278.0 million in cash and short-term investments despite having repurchased 5.2 million shares at an average price of $7.78 per share.

The geographic breakdown of revenue was as follows: the U.S. represented 47% of total revenue; Europe 43% of total revenue; and Asia-Pacific 10%.

Total revenue by vertical was as follows: financial services, 22%; telecommunications, 16%; insurance, 9%; energy, 9%; government, 7%; life sciences, 6%. No other industry represented more than 5% of revenue.

The approximate break out of license revenue by product family and again, I remind you, this is approximate, given the frequency of bundled product sales was as follows: our SOA product family, 51%; Business Optimization, 31%; and BPM, 18%. BPM had a particularly encouraging quarter on a relative basis and Business Optimization continued to do well.

Our top ten customers represented 24% of revenue, versus 25% a year ago, and we had 7 deals over $1 million in license. License deals over $100,000 rose to 91, versus 73 in the year ago period. Four license deals over $100,000, the average deal size was approximately $583,000 versus $684,000 a year ago and $602,000 in Q1. We added 46 new license customers in the quarter versus 18 in the year-ago period.

On sales headcount, we ended Q2 at 171, up four over Q1. Also of note, after the quarter closed, we announced our intent to acquire Insightful Corporation, a Seattle-based provider of statistical data analysis and data mining solutions, in a transaction valued at approximately $25.0 million. We expect this transaction to close late in our third quarter.

We are not, at this time, including any estimates for Insightful in our guidance, until the transaction closes, but we do expect the transaction to be accretive to earnings over the first year after closing. This transaction is especially complimentary to our Business Optimization product family.

Turning to our outlook for the business, I would first reiterate Vivek’s comments that we remain positive on our market position and our long-term opportunities for growth. Our updated guidance is informed, however, by caution regarding the broader macro economic environment and the fact that we fell short of our targets in Q2. In light of these considerations we are taking a conservative approach on guidance.

From an expense perspective, we are also going to be more conservative and will manage spending carefully for the remainder of the year. As Vivek outlined, we will continue to pursue our target of 190 quota-carrying sales people by year end, but we will offset this cost with savings elsewhere.

Looking first at Q3, we expect total revenues to be between $151.0 million and $157.0 million with license revenue in the range of $60.0 million to $65.0 million. The non-GAAP gross margin is expected to be just over 73%, with a non-GAAP operating margin between 13% and 14%. Non-GAAP EPS for the quarter should range between $0.07 and $0.08, with GAAP EPS ranging from $0.01 to $0.03.

For the full year we are now guiding to total revenue in a range of $650.0 million to $660.0 million. License revenue is expected to be between $280.0 million and $290.0 million. The non-GAAP gross margin should be about 75%, with a non-GAAP operating margin between 17.5% and 18.5%. We expect non-GAAP EPS to range between $0.43 and $0.45, which maintains our original EPS guidance for the year. GAAP EPS should range from $0.21 to $0.24.

With this revenue and earnings guidance, we expect total cash flow from operations for the year to rise about 15% to 20%.

And with that, Vivek and I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John DiFucci - JP Morgan.

John DiFucci – JP Morgan

Question on the guidance, could you give us a little more information about where you put the caution in? Obviously it was a tough quarter but at the same time there was some strength, especially the cash flow number looked really good, I would imagine because there weren’t a lot of large deals, which you did comment at the end, which sends up receivables.

But at the same time, cash flow was really strong this quarter and your guidance, although you had a lot of comments that sounded pretty conservative, still looks to be, for the year anyway, it looks pretty decent. You’re showing some pretty decent growth in cash flow and some of the numbers there. So maybe if you could just give us a little more color around the conservatism that you actually put into the guidance.

Murray Rode

John, for starters, we did effectively lower annual guidance on a couple of dimensions, both total revenue and license, so that’s where some of the conservatism comes in. I think we have said all along, as we’ve entered the year, that we really didn’t feel that the guidance we were giving was that aggressive since it originally only assumed about 6%-9% growth in the core business and then had a full year of Spotfire in the numbers versus a half year. So we’ve backed off a notch from that with this guidance.

At the same time, as I think both Vivek and I said in our comments, we still remain pretty positive on the opportunity and I think the conservatism is really more a nod to take into account of a little bit more volatility perhaps, because of the macro environment.

So a little bit more conservative on revenue and then because we do feel we are more conservative on our expenses we can still maintain the EPS guidance we have.

John DiFucci – JP Morgan

But can you give us a little more, because you’re still planning to hire more, keep your goals for sales people. What expenses, is it marketing, or what are the areas where you think maybe you’ll cut back a little bit?

Murray Rode

A few things. If you think about it, the sales organization is a pretty big organization and has a variety of different roles, not just quota-heads. So there are roles that we have already been streamlining to make room for more quota-heads and simplifying our sales organization. And that’s something we’ve done through the first half of the year.

Secondly, we are making more room in the marketing budget and we’re being very careful as well with our G&A expense.

John DiFucci – JP Morgan

On Spotfire, you’ve seen some pretty good traction out of that in the prior two quarters. Could you give us a little of information there? Especially, given the environment, I would think, anyway, larger deals are more at risk and giving a low ASP for Spotfire, perhaps that might be flying a little bit further underneath the radar of cost cutters for some of your customers.

Murray Rode

I think that’s true in some cases, although I don’t always think that’s true. But Spotfire did well in the quarter and we’re not breaking out specifically the Spotfire number, but again, they were just a bit over half of the Business Optimization number that I gave for Q2.

Operator

Your next question comes from Tim Klasell - Thomas Weisel.

Tim Klasell – Thomas Weisel

Just a quick question around your services line, it was a little bit stronger than I had anticipated and margins also improved. Was that being driven by Spotfire or was there some extra maintenance or something on the core TIBCO side?

Murray Rode

It was really more driven by strong maintenance, the margin part was driven more by strong maintenance growth. Services did grow as well, and we did hit the margin targets we had for the quarter but the margin benefit was coming mostly from maintenance growth.

Tim Klasell – Thomas Weisel

And then I want to delve into your pipeline. Your guidance would indicate a real strong finish to the year and TIBCO certainly is known for that, but what gives you the confidence in the pipeline that you can close than in the Q4? Any metrics you can share with us, or anything would be very helpful.

Murray Rode

I think quantitatively, Tim, particularly coming of the Q2 that we had, we are careful with coverage in the pipeline, the total level of coverage, and looking at the big deals that we have and how they might play out and scrubbing the forecast for some of those deals that seem more speculative, so generally, at this point, we feel good about the pipeline in terms of the coverage that we have for guidance.

Tim Klasell – Thomas Weisel

And are you using a similar close rate that you would in prior quarters or has the macro gotten you a little bit more conservative?

Murray Rode

We’re more conservative.

Tim Klasell – Thomas Weisel

And then with the Insightful acquisition, can you walk us how you bring a little bit of that to market? Can you use the same channel with Spotfire you’re using right now or can you walk us through how that fits into your go-to-market strategy?

Murray Rode

We’ll talk about that in a lot more detail once the transaction actually closes, which I would expect we will do coming off our Q3. But generally, Tim, we will leverage the Spotfire channel. So that’s where it fits most tightly.

Operator

Your next question comes from Derek Bingham - Goldman Sachs.

Derek Bingham – Goldman Sachs

First, on some of the deal slippage that you mentioned, do you have any more color you can give in terms of how large some of these deals might have been and if you have made progress to close them already?

Murray Rode

We have made progress. We basically saw about $10.0 million in value of deals slip in the last week, and a big part of that slip even very late in the last week. So far we have closed close to $4.0 million of that. There’s another $4.0 million that we currently deem as likely, in terms of the forecast, and then another $2.0 million, which is potentially more speculative for the quarter.

Derek Bingham – Goldman Sachs

And just trying to do the math on the approximate segment breakdowns, they look like all the segments seem to have done quite well, with the exception of SOA. Is there anything unique that you see going on there that you’re concerned about? Is it just the fact that those tend to be the largest deals? And any changes you’re making there to get that going.

Murray Rode

No. We certainly don’t see a problem. I think if anything, what we did see was an encouraging quarter for BPM. Vivek, you may have some color to add just on the general demand for products across the product lines.

Vivek Ranadivé

Yes. We’re seeing, actually, Derek, very strong demand for our product of Business Optimization. We are starting to see a resurgence of demand for just the messaging products, our new SOA Active Matrix family is catching on. And what we’re seeing really is something I briefly mentioned on this call, but we’ll talk more to on future calls, which is this move away from a storage database architecture to more of a memory architecture. And it’s just brought on by the increase and scope in velocity that everyone’s experiencing.

And companies like Amazon, eBay, and so on, Google, are well known for using these memory architectures and we’re starting to see that that actually more and more of the mainstream corporate world is moving in that direction. So, we are seeing strength pretty much across the board.

Operator

Your next question comes from Kash Rangan - Merrill Lynch.

Kash Rangan - Merrill Lynch

I was just wondering if you noticed any disruption potentially due to the BEA acquisition being closed by Oracle in the middle of your May quarter and also your forward-looking views on how that acquisition potentially impacts or does not impact your business.

Vivek Ranadivé

We haven’t seen any disruption from that, Kash. Deals that slipped had absolutely nothing to do with that. We are seeing a lot of BEA sales people on the marketplace, which is good for us. And we’re also starting to see a little bit of a backlash where customers of ours are now asking if what we have can actually help them move away from apps overs because apparently their maintenance fees are being upped.

So we have seen no disruption. If anything, people are more closely examining ways to get off their dependence on Oracle.

Murray Rode

I would echo Vivek in saying we think there is, Kash, and I think we talked about this on the last call; this is a time of opportunity for us while the whole integration strategy between Oracle and BEA gets sorted out. If your question was really are we seeing disruption in customers relative to their purchase of Oracle and BEA, that disruption we are seeing and we see that as opportunity?

Kash Rangan - Merrill Lynch

You gave us the product break out, Murray, if you look at the deals that slipped was there any specially concentration on the SOA, Optimization, or the BPM side?

Murray Rode

Not really. They were really in all three of the categories. Primarily it would have been SOA and BPM. They were most of the deal slippages, but I honestly wouldn’t read anything into that, I think that was just how it worked out.

Kash Rangan - Merrill Lynch

And also, the cash flows, you’ve done a good job, the first half of the year compared to last year, yet it seems the overall forecast for the year shows pretty modest growth. Is there conservatism or was there a front-half weighted cash flow performance that we should be paying attention to as we build our cash flow models?

Murray Rode

Part of this, is a result of having a year that is frequently back-end loaded so you can collect a lot of that cash at the start of the next fiscal year. So that’s some of what you see informing our modeling. I think, though, that we’ve done particularly well on collections and focusing on collections so that’s given a lot of strength in the first half of this year.

Operator

Your next question comes from Nabil Elsheshai - Pacific Crest Securities.

Nabil Elsheshai - Pacific Crest Securities

One, on the partnership front, you have talked a little bit about investing more in there. Is there any data you can give or updates on the progress on that front?

Murray Rode

Nabil, that continues to be something we’re focused on. I think we’ve talked about the emphasis we’re putting on continuing to build our relationships with key SIs like EDS or InfoSys and others. So that continues. No particular milestones I would call out this quarter but that’s something that will be of continued interest through the rest of the year.

Nabil Elsheshai - Pacific Crest Securities

And where are we on the buyback, how much do you have remaining?

Murray Rode

We had a new buyback approved for about $300.0 million and the buyback we executed in Q2 burned off about $40.0 million of that so the balance is at about $260.0 million.

Nabil Elsheshai - Pacific Crest Securities

And if I could go back to the comments on the SOA line, somebody said earlier it certainly seems like the weak area. Is there anything you can drill down on in terms of messaging being maybe a saturated market or SOA maybe it’s not yet a driver for incremental business. That seems like the problem area and I’m just trying to get my hands around it.

Murray Rode

I don’t think we, as Vivek and I both said, that we see the performance in the quarter as indicative of any particular weakness in SOA. In fact, last couple of quarters, within that broad SOA segment, we’ve seen good traction with Active Matrix, as Vivek mentioned.

So, I think it was a little bit more of a phenomenon unique to this quarter. Remember that SOA had done quite well as a product segment for us for many quarters, so this, in fact, may just be unique to this quarter. And any trend on this, really Nabil, is hard to know for sure until we finish out the year.

Vivek Ranadivé

And also a couple of other factors, Nabil. One is that oftentimes SOA, BPM, and Business events, they all either go together or they fall off one after the other. So, they are actually related.

The second thing is that we actually did a really good job this quarter of maintaining very, very strong pricing discipline. And when we were competing with the smaller companies a few years ago, we found that we had to do whatever it took to just get the deals. The smaller companies were very aggressive with pricing. What we’re finding now is that we’re actually holding the line on price and that seems to be working for us. I just did want to mention that as well.

Operator

Your next question comes from Katherine Egbert - Jefferies & Co.

Katherine Egbert - Jefferies & Co.

Can you elaborate a bit more on the expense control? I know you said you were going to hit hard in the G&A area, some development. Can you just give us some examples of things you’re doing?

Murray Rode

Well, what we said is that we would carefully manage expenses through the second half of the year. So it means more just pulling back a bit on other kinds of investments we might have made around products or the general operations. So it is across the board, Katherine. All things, we’re just holding the line a bit more.

And then in terms of sales, I think the other thing that was asked about and I talked about, is just focusing the investment in the sales and marketing area more on the quota-carrying heads and again, just limiting to a greater extent everything else.

Katherine Egbert - Jefferies & Co.

Can you tell us in your guidance for the year and for the forward quarter what you are looking for the core growth? Remember, you said it was 6%-9% before, what is it now?

Murray Rode

It’s only low single digits in the guidance.

Katherine Egbert - Jefferies & Co.

For both the year and the quarter?

Murray Rode

For the year.

Katherine Egbert - Jefferies & Co.

What about for the August quarter?

Murray Rode

For the August quarter I would say there’s a little bit more variability. Sort of giving ourselves more variability there. There could be some growth year-over-year, more significant growth this quarter, given the Q3 numbers of last year.

Operator

This concludes our Q&A session for today. I would like to turn the call back to Murray Rode for closing comments.

Murray Rode

Thank you all for joining us today and we’ll see you on our next call after Q3.

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