BMC Software Inc. F1Q09 (Qtr End 30/6/08) Earnings Call Transcript

Jul.24.08 | About: BMC Software, (BMC)

BMC Software Inc. (NASDAQ:BMC)

F1Q09 (Qtr End 30/6/08) Earnings Call

July 24, 2008 5:00 pm ET

Executives

Derrick Vializ - IR

Bob Beauchamp - CEO

Stephen Solcher - CFO

Analysts

Michael Turits - Raymond James

Derek Bingham - Goldman Sachs

Kevin Buttigieg - Stanford Group

Abhey Lamba - UBS

Operator

Good day, everyone and welcome to today’s BMC Software First Quarter Earnings Results Conference Call. 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 first 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 an update on 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, including Q&A, will be made available 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 http://www.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 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 http://www.bmc.com/investors.

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

Bob Beauchamp

Thank you, Derrick. Good afternoon everyone and thank you for joining us on today’s call. I am pleased to report that BMC continued the strong momentum we had last year and that we started off fiscal 2009 with an impressive first quarter. Our strategy took an important step forward as we completed the acquisition of BladeLogic. The successful integration of BladeLogic enabled us to create the industries new leader in IT Service Automation which is the fastest growing part of Business Service Management. One of the many benefits we gained with the addition of BladeLogic is their experience leadership.

Dev Ittycheria, President and CEO of BladeLogic joined BMC as Senior Vice President for Strategy and Corporate Development. John McMahon formerly BladeLogic’s Chief Operating Officer joined as Senior Vice President leading our Enterprise Service Management worldwide sales and services organization. Luca Lazzaron was appointed Vice President and General Manager of EMEA.

BladeLogic’s focus and intensity is already delivering benefits to the combined organization. Following the acquisition of BladeLogic we completed our first public debt offering, this offering helped us optimize our capital structure, establish a name in the fixed income market and obtain investment grade ratings, a key positive for our customer base. These two major events, the BladeLogic acquisition and our successful public debt offering, has helped to positively position BMC for our current and future opportunities.

So as you can see, we’ve had a busy start to our fiscal year. At the same time, I think our fiscal results reflect that we kept our eye on the ball. We maintained our sales momentum, our sharp operational focus and our operating discipline.

Let me share with you some financial highlights for the quarter. Total revenue increased by 14% with growth in all major geographies. We saw accelerated growth in total revenue for the fifth consecutive quarter. We saw significant year-over-year growth in our ESM license bookings on both a total and organic basis. This contributed to the strong year-over-year growth in total license revenues of 19%. Our non-GAAP operating margin was 25% for the quarter, up from 23% in the year ago period.

Non-GAAP diluted EPS for the quarter was up 19% compared to the year ago period and we continued to repurchase shares. At quarter end we had over $1 billion in cash and investments. Our continuing success in terms of increased bookings, revenue, non-GAAP operating margins and non-GAAP diluted EPS reflect the strategic decisions that we've made and continue to make as we deliver on our BSM strategy.

As forced to research noticed in recently published report titled the “Mega Benders in IT Management Software”, and let me quote here “BMC continues to be the BSM reference”. BMC's BSM success is not only based on internal technology or acquisitions. It is actually the convergence of strategic visions, technology build-up and marketing and sales execution. While BMC may not be the absolute leader in every single category, the whole is far more than the sum of the parts. Putting strategy, technology and execution together is what makes BMC the BSM leader.

The strong momentum we are building in BSM is also reflected in recent sales wins. During the quarter, we signed important new contracts with VMware, the United States Air Force, (inaudible), Unisys and affiliated computer services. We're happy to say that following a comprehensive competitive process, VMware, a leader in virtualization technology selected BladeLogic as their service automation standard. We're proud to announce that RSA, another division of EMC, also selected BladeLogic as their standard last quarter.

Our contract with the U.S. Air Force, which is the single largest public sector, wins our ESM business and has attained calls for a range of support for the combat information transport system program office. (inaudible) a leading global food and waters company, has fully implemented BMC's IT service management offerings. Channels partners continue to be an important part of BMC sales mix. Units have standardized these outsourcing services in Asia-Pacific on our BSM platform. ACS has also standardized on our solutions. As you saw in our announcement earlier this month, EDS also standardized on BMC's Atrium configuration management database CMDB in Asia-Pacific.

These decisions by global outsourcers and system integrators to standardize on our BSM technology are strong indicators of the strength of our platform. Clearly our strategy and our solutions are in high demand with customers and partners around the world in a broad range of industries. And while we are pleased with the success, we're not standing still. We see significant opportunity ahead to reinvent and improve how companies manage IT and strive to run IT as a business.

Customer acceptance of the value drivers for BSM is no longer restricted to early adopters. Today we see the vast majority of global enterprises embracing the core concepts of BSM as the wave is just beginning to rise. The acquisition of ITM software this quarter is another step forward in our strategy. ITM offers a unique integrated solution that provides customers with a single, comprehensive view of all the applications that an IT organization needs to run itself as a true business unit.

We focused our BSM offerings around three disciplines: service support, service assurance and service automation. The first, service support, reduces complexity and makes customers support change management and asset management integrated and efficient. The second, service assurance, delivers automated and predicted technology across our customer's entire enterprise. The third, discipline, is service automation. We think that there is extraordinary opportunity here. It's being driven by the increased complexity of IT environments, the sheer numbers of virtual and physical servers being deployed today.

Service oriented architectures, new software platforms and applications all combine to make IT management more time consuming, more air prone and ultimately more expensive. These new scaling issues make the old ways of management in some cases grossly insufficient. For example, on average it is three times more expensive to manage and provision a server than it is to buy one today.

The promise of capital expense savings of the new platforms such as virtualization spring, can be more than offset by the increased operating cost of managing those new virtual servers. To capture these savings, enterprise has increasingly recognized the need to adopt BSM service automation tools before the virtualization environments are placed into production.

Fundamentally, service automation is about three things. First, it's the ability to rapidly provision services and the entire surrounding underlying infrastructure around it. Second, its ability to manage and control those services and finally its ability to enforce compliance, not only from a security and operational point of view, but also from a regulatory point of view.

As it addresses these challenges, service automation reduces IT downtime, increases the responsiveness of IT to the business, reduces risk and dramatically lowers cost while increasing staff productivity. Even in the current macroeconomic environment, market demand for the automation of IT processes is strong. It provides significant opportunity for businesses to rein in IT management and administrative costs while still meeting the reliability and responsiveness requirements of the business.

Turning now to our MSM unit, our strategy here is successful and unwavering. We like this business and we are the leader in it. The mainframe market continues to be highly stable in terms of demand and pricing. Customers are far more rational in their purchasing capacity than they were a few years ago. As a result, we're seeing solid growth with improved visibility.

New business activity during the quarter for our MSM unit further confirms that we're expanding our footprint within existing customers and that we're also continuing to win competitive replacements. For example, we added about a dozen new MSM customers this quarter. We signed a major deal with AT&T services that significantly strengthened our presence inside this enterprise. We also renewed and grew our relationship with the Vanguard Group and we're proud to say that ING Bank purchased a broad portfolio of MSM solutions from last quarter.

Going forward, we expect the mainframe software marketplace will be flat to slightly growing in the near term. We see a strengthening of the mainframe renewal cycle beginning in fiscal 2010. Our plan is to leverage the strength of our solutions and our experienced people to maintain and enhance our share. We expect that our industry leading research and development, sales and support teams will continue to create the most compelling product lines and value propositions in the mainframe software market.

Our focus is on increasing our customers' (inaudible), broadening our footprint in existing customers and winning competitive replacements while maintaining our high level of profitability and cash flow.

As we look out over the remainder of fiscal 2009, we are mindful of the impact that the global economic conditions and credit crunch may have on IT spending in general. There have recently been conflicting data points on the appetite of CIOs for large companies for IT spending over the course of the year. While we have not yet seen this maturely impact BMC, even in the struggling financial services sector, we recognize no enterprise software services company is immune from economic cycles that impact its customers.

For that reason, we have developed plans to address a weaker demand profile should we see that develop in the months ahead. But as for now, we continue to see strong demand for our products. One reason may be because our BSM solutions offer customers substantial ROI with a relatively short pay back period. We expect that the cost savings and productivity improvements that our BSM solutions offer will resonate much better than many other IT budget items in almost any type f IT spending environment. Before I turn the call over to Steve for a detailed financial review, I want to close by noting our key objectives for fiscal 2009.

First of all, to accelerate the top line growth of our ESM unit by maintaining a more focused approach in service support, service assurance and service automation. Second, to enable our MSM unit to capitalize on the continued stabilization of the mainframe market and optimize its profitability in cash flows. And thirdly, to maintain the discipline in how we run our business in order to yield greater business process efficiencies to support long-term growths with a watchful eye to changes in global IT spending patterns.

I'll talk more about our outlook for fiscal 2009 later in the call. But first, here is Steve for more information.

Steve Solcher

Thanks, Bob. Before I go into the specifics of our financial results, I would like to briefly discuss the improvements we're making to our company's financial disclosures. First, we are providing additional financial information regarding our two business segments, enterprise service management, ESM and mainframe service management MSM. This includes management's view of segment operating income and segment operating margin. Our sharp focus on these two separate business units has been a key drive of our growth and profitability.

Second, we will now provide ESM licensed bookings and revenue information consistent with our market opportunity. As we discussed at our investor day this past March, ESM is now divided into three disciplines: service support, service automation and service assurance. Beginning in this quarter we are providing ESM licensed bookings and license revenue for each of these disciplines. Slide nine includes five quarters of historical results. We have also provided a brief description of each discipline on slide eight.

Finally, I would like to note that our quarterly results reflect the impact of the BladeLogic acquisition which we closed in April. As Bob mentioned, BladeLogic had a very strong quarter, as licensed bookings doubled from a year ago.

In the first quarter non-GAAP operating income increased 24% from $89 million to $111 million. Non-GAAP operating margin increased from 23% in a year ago quarter to 25% this quarter. We expect continued year-over-year improvement in our non-GAAP operating margin throughout fiscal 2009. Please refer to slide five for our non-GAAP income statement, which includes segment profitability for our ESM and MSM business units.

Our improved profitability in the First Quarter was driven by our ESM business. Non-GAAP operating income for ESM business unit increased to 18 million from essentially breakeven. ESM operating margin increased by 7 percentage points to 7%. We are pleased with the progress we are making and significantly improving the profitability of our ESM business. We expect continued year-over-year improvements in our ESM non-GAAP operating margin throughout fiscal 2009.

Our MSM business is highly profitable and stable. MSMs non-GAAP operating income increased by 4% to $93 million and its non-GAAP operating margin remain essentially flat at 52%. Non-GAAP net earnings for the first quarter were 82 million, an increase of 11% over fiscal 2008. Non-GAAP diluted EPS for the period was $0.43, up 19% compared to the year ago period. This reflects a non-GAAP effective tax rate for the quarter of 31%.

These non-GAAP results reflect diluted shares outstanding in the first quarter of $194 million versus $205 million in the year ago period. GAAP operating income in the first quarter of fiscal 2009 was $13 million compared to 61 million in the year ago quarter. GAAP net income and fully diluted EPS were $1 million and $0.01 compared to 55 million and $0.27 in the first quarter of fiscal 2008.

First quarter GAAP net income for fiscal 2009 was impacted by charges associated with the acquisition of BladeLogic, including a $50 million in process Research and Development write-down in the incremental intangible assets amortization.

Turning now to bookings, in the first quarter of 2009, total bookings of $480 million were up 9% compared to the year ago period. Total bookings on a trailing 12-month basis were $1.82 billion, up 4% compared to the year ago period. The weighted-average contract length for total bookings on a trailing 12-month basis was 2.1 years, a 12 % decline from 2.4 years in the year ago period. With the increase in bookings and after normalizing for contract length, trailing 12-month annualized bookings for the first quarter increased 19% over the year ago period to $870 million.

Looking at this trend in annualized bookings growth on a trailing 12-month basis, this is now the tenth consecutive quarter of overall growth as well as the third consecutive quarter of double -digit growth. Please refer to slide seven in our presentation.

Now, let me turn to the performance of each of our business units. For our EMS business unit, license bookings are the best measure of performance. Total ESM license bookings were $96 million in the first quarter, up 38% over the year ago period. This increase reflects in part the addition of BladeLogic. On a pro-forma basis, or if we had included BladeLogic's results in the year ago quarter, ESM license bookings growth would have been 22%.

With ESM, license bookings for Service Support were $52 million, up 36%. License bookings for Service Automation were $24 million, compared to 2 million a year ago. On a pro-forma basis, Service Automation license bookings would have risen 113%. License bookings for Service Assurance were $20 million, down 32%. While we know that Service Assurance had a tough compare versus the other quarter, we also know the performance of this business needs to improve. For further information regarding license bookings by Business Segment, please refer to slide nine of our presentation.

Turning to our mainframe unit, we believe the MSM business unit is best evaluated on the basis of total and annualized bookings over the trailing-12 months. In the first quarter total MSM bookings on a trailing-12 month basis increased 1% to $753 million with an average contract length of 2.8 years. In the year ago period, total MSM bookings were $747 million with an average contract length of 3.1 years. After normalizing for contract length, total annualized MSM bookings for the trailing 12 months were up 10% to $264 million. We are pleased with the performance of this business unit, but continue to point out the Mainframe Business is lumpy and as a result bookings can vary quarter-to-quarter.

Turning to revenue, total revenue for the quarter was $438 million, a 14% increase compared to the first quarter of fiscal 2008. License revenue in the first quarter was $149 million, an increase of 19% compared to a year ago. ESM license revenue was $90 million, an increase of 35%. MSM license revenue increased by 1% to $60 million.

During the quarter, the percent of licensed bookings that was deferred was 49% which was lower than the 58% in the year ago period. One of the key drivers for the decline in the ratable rate was the lower amount of term based transactions that we signed during the quarter. For the first quarter, maintenance revenue was $254 million, up 8% compared to a year ago. ESM maintenance revenue was $137 million, up 9%. And MSM maintenance revenue was $118 million, up 7% compared to the first quarter of 2008. Professional services revenue, which is included in the ESM segment, increased by 43% to 34 million. From a geographic perspective, total revenue and license grew in all major regions for the quarter. We saw particular strength outside of the U.S.

Moving next to operating expense, non-GAAP operating expenses were 327 million, up about 10% from the year ago period. This reflects the addition of BladeLogic and the negative impact from currency movements. Looking at our business units, ESM's non-GAAP operating expenses were 242 million compared to 216 million in the year ago quarter. MSM's non-GAAP operating expenses were 84 million compared to 80 million.

Over the last few years we've instilled in our business a strong operating and financial discipline. This has enabled us to control operating expenses and convert more of each incremental dollar of revenue into operating income. Continued fiscal discipline and business process efficiencies will be a driver of improved operating margins over the course of this year.

Turning now to the balance sheet, total deferred license revenue at the end of the first quarter was 554 million, which was flat on a sequential basis. During the quarter, we deferred 73 million of license revenue or 49% of license bookings and recognized 74 million of deferred license revenue from the balance sheet. Total deferred revenue increased by 42 million sequentially to 1.82 billion, a record balance.

Software development costs on the balance sheet were 111 million, down 2% compared to the fourth quarter of 2008, as we capitalized 13 million and amortized 16 million during the quarter. Cash and investments at June 30 totaled 1.07 billion. Our net cash position was 762 million. During the quarter, we completed the acquisition of BladeLogic. We also completed our first public debt offering, which helps to optimize our capital structure.

For the quarter, cash flow from operations was 151 million, which met our expectations. During the quarter, we remained committed to our existing share repurchase program. We repurchased 2.6 million shares for an aggregate value of 100 million.

With that, I'll turn the call back over to Bob for his concluding remarks.

Bob Beauchamp

Thank you, Steve. As you've heard, we're off to a very strong start. Our performance in the first quarter puts us on track to achieve the annual goals that we outlined for you for fiscal 2009. To remind you, 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. Although our first quarter non-GAAP effective rate was 31%, we expect a full year non-GAAP effective tax rate of 30%.

Our non-GAAP EPS excludes an estimated $0.84 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 activities.

The assumptions underlying this full year fiscal 2009 estimate include total bookings and total revenue growth in the low double digits, a license booking ratable rate slightly higher than last year, a continued improvement in non-GAAP operating margin, dilution due to the BladeLogic acquisition including the write down of deferred revenue and retention and integration cost, and other income that reflects the current interest rate environments.

We expect full year fiscal 2009 cash flow from operations to be between $620 million and $670 million, seasonally skewed to the second half of the fiscal year. So, in summary, we're off to a great start. We're excited about fiscal 2009 as each of our goals for the year represents a significant increase over 2008.

With that, we'll now turn the call over to questions. Operator?

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions). We'll pause for just a moment.

Bob Beauchamp

Operator as we're paused, let me just apologize. I'm told that we had some of our investor call materials were delayed in being loaded. I believe they're all available now on the web. So if any of you were attempting to download those presentation materials, they are available now. Thank you.

Operator

Thank you. We'll go first to Michael Turits with Raymond James.

Michael Turits - Raymond James

Hey guys good afternoon. Two questions. First of all, can you give us some sense of what your expectations for mainframe performance are this year? Granted, it should be a tough year or close to it from a renewals perspective. What do you expect in terms of license revenues, bookings? And then the second question is around maybe the securitization of receivables. What are the trends in this market? Is it tough to get that securitized and what are customer's preferences? Are they looking to finance more or less, more to finance or more to trade?

Steve Solcher

So, Michael, I'm going to take both questions. On the MSM side, the mainframe side, both bookings and revenue were expecting that trend to be flat to slightly up. The license revenue side of that is probably going to be down where the maintenance side will be up. So the blended number would be in both cases probably, you know, 0% to 2% up.

On the securitization side, what's interesting that we continue to see, it goes back to my belief that I've said, you really can't look at trade and finance without looking at them together. This quarter we sold very little but yet we had very strong cash flow. We sold about 33 million. If you look in the fourth quarter, we sold in the twenties and we had a $200 million number.

So it just reconfirms my belief that when you look at our balance, you know, you need to take the two accounts and put them together. We're indifferent. We've always been indifferent about how customers package their transactions. We're not seeing any of the third party institutions that buy this paper backing off at all from any of their purchases. So, you know, if a customer wants to finance it, we're going to sell it. If they don't, that's fine. We'll just collect it through your normal trade practice.

Michael Turits - Raymond James

Steve. A follow-up on those answers on the mainframe side. You said bookings were slightly up would bookings be up on an annualized basis also?

Steve Solcher

Yes.

Michael Turits - Raymond James

Good. Okay and then on the third party stuff what customers -- is there any trend in terms of customer's preferences? Are they looking to pay up front or looking to finance more?

Steve Solcher

I don't -- it just varies. It varies on the size of the transaction. We are not pushing one or the other. I think the larger transactions that we do, so the bigger linked wise as well as dollar wise there is probably more of an appetite to finance. But I've seen large transactions where they pay up front. So it's all finance. But I've seen large transactions where they pay up front. So it's all over the board.

Michael Turits - Raymond James

Okay. Great. Thanks very much, guys. Thanks, Steve.

Operator

Next we'll go to Derek Bingham with Goldman Sachs.

Derek Bingham - Goldman Sachs

Hi gentlemen. I wondered if you could give us some color on, some more color on Blade’s contribution to the quarter, both from the top line and expense line, and if there has been any change to out outlook from kind of a hundred to hundred that you talked about on the last call?

Steve Solcher

Okay. Derek I am going to take that too. For me, I don't mind giving you the Blade contribution. I think one of the things that we're trying to center the financial community around is thinking about it on a pro forma basis. So when I’d look at it, and I'll give you the two numbers that are probably the most relevant that you're looking at, so ESM license bookings growth was 38%. On a pro forma basis, it was 22%. On an organic basis, it was in the low double-digit growth rate. For revenue, we reported 14% reported revenue growth in total. On a pro forma basis, that was about 9% and on our organic basis, it was 8% and what we would like, the outside world has started to thinking about it is, 'what is Blade’s part of this today' and we want people to start thinking about it, if Blade were part of it a year ago. So a lot of the numbers we're trying to get you to think through is with that [in mind].

I think they did better than we thought both on revenue as well as bookings. So, you know, you could back in to their full year dilution, at least at this point in time is probably going to be a little better. But, if we're early in, it’s the first quarter, and we’ve got three really [?] quarters ahead of us, and I would not like us to get ahead of that.

Bob Beauchamp

And just a comment off the numbers a minute, the uptake on Blade is fantastic, the customer excitement around it and I have been in this, I have been BMC for 20 years and I don't know that I've seen a product line, it's not just Blade, it's Blade and the combination of the other technologies around service automation and the whole promise behind it, is as hot as anything I've seen in the 20 years I've been with the company.

Derek Bingham - Goldman Sachs

And on that point, Bob, how much is the traditional sales force or kind of your installed base of sales guys impacting the Blade deals in the pipeline so far?

Bob Beauchamp

It wasn't too much yet because it's been less than 100 days. There has been co-operation in both directions. We've had, I can think of a transaction, two different customer situations this quarter, one where we had previously lost to a competitor, Blade had lost. And that in our briefing center as we presented BSM, and this was a very excited BSM customer who had already standardized on our CMDB and on the BSM concept, has asked us now to present a proposal to replace our competitor with Blade as they are looking at us as much [more] holistically and I can think of an example of a couple of excellent customers of Blade’s where they where they went in and sold a significant transaction to the customer. Blade technology and then BMC into the deal where we were not, so I think that you'll see the benefits of that cooperation really taking hold this week. Right now, in fact, all day and last several days in Europe, our worldwide European sales management team has been together combined with our new sales leader John McMahon going through every single transaction, all of our forecast, discussing the synergies, we just did that last week in the Americas, and in a meeting we had in Boston. There is an extraordinary amount of excitement about the opportunity to cross sell and work together, but it will take a little time for the pipeline to see the full benefit of that cross selling.

Derek Bingham - Goldman Sachs

Okay. Thank you. Thank you both.

Operator

(Operator Instructions) We'll move next to Kevin Buttigieg with Stanford Group.

Kevin Buttigieg - Stanford Group

Thank you. Other than kind of the cross selling opportunities that you see with BladeLogic and the new management team that came over from Blade, could you talk a little bit about what some of the other changes that have been made, or that you anticipate being made?

Bob Beauchamp

Kevin, are you still there? Operator, are you still there?

Operator

Mr. Buttigieg (Operator Instructions)

Kevin Buttigieg - Stanford Group

Can you hear me now?

Bob Beauchamp

Yes.

Operator

Yes, we can hear you.

Kevin Buttigieg - Stanford Group

Okay. I apologize for that. Bob, thanks for the discussion on kind of the cross selling opportunities on the BladeLogic side. What I was wondering about as well was sort of what other anticipated changes that you might expect from the new sales leadership that came over on the BladeLogic side?

Bob Beauchamp

Sure. Kevin, I think that there is nothing I can think of that is going to have a greater positive impact on BMC in the next many quarters than excellence in sales execution. I think that now that our product line is very well understood, the message is crisp, the competitive differentiation is well understood and provable with a large installed base of reference customers, and that this is the season for BMC to execute really with intensity. And what I saw in the BladeLogic leadership was a level of sales intensity and process that I have seen multiple times in my life, I saw it at BMC, certainly very intensely when I first joined the company. I saw it at Mercury interactive. I saw it at EMC in the 90's. And I've seen a few times in my career as sales organization that is just extraordinarily intense and well and executes very well. And I think what you will see from BMC, particularly after the very positive feedback I have received from the BMC, the BMC employees who have been here a long time, are saying that the John McMahon era is very exciting that the clarity, the simplification of the processes - and I’ll give you some specifics, you’ll see this week or excuse me, over the next five weeks, you're going to see our entire worldwide sales organization trained and serviced, in our Service Assurance product line.

He looked at our Service Assurance product line, as the area of the business where we've been in a low single-digits decline for some time, and sees that as an opportunity to improve that significantly, if we really focus on it. The way he's doing that is he is laying out the quota across the entire organization, training the entire worldwide organization on those product lines, adding sales commission kickers and bonuses and other components to really invigorate that, and apply a lot of energy into those products lines. So you'll see more feet on the street in sales, less non-selling overhead or head count in the organization. You'll see the head count move to presales and sales people. You'll see simplifying of the organization, more account representatives covering more accounts, simplified sales plans and some real focused intensity on how we hire and train our people.

Kevin Buttigieg - Stanford Group

Okay. Thank you. And then I agree, it doesn't look like the economic environment had any impact on your business this quarter. But, could you talk a little bit about that some, and give additional color perhaps as well, around your contingency plans in the event that you do see that slow down?

Steve Solcher

Sure we have as you said -- as we said in the prepared remarks, we did not see the impact of the economic slowdowns last quarter and not only that we actually had a exceptionally good quarter in the financial services sector. We mentioned a few, but just like the previous quarter, financial services were really quite strong for us. We didn't see delayed orders, we didn't see slipped orders, and so it was we didn't see the things you would expect to see if there is a pull back.

I will tell you that I met with the CIO of one of the largest banks in the world headquartered in New York a few weeks ago, and I asked him about this and they are in the eye of the storm and he told me that their IT budget was going to come down. He expected originally IT spending to be in the mid -- if I remember mid-teens and he saw that that would come down in to the high single digits but that he believed that their spending on our sort of technology -- the things that -- the type of technology we provide -- would actually go up from the original plan because they saw it as a way to drive down long-term operating expense through automation.

So he said in this case he saw it as a positive for companies that provide true automation technologies and process technologies. So interesting, that he said that directly to me right in the middle of the negotiation and discussion and we are seeing that. Now, in terms of contingencies we have developed a set of contingencies where there are really couple of tiers to it. A modest impact and a more significant impact, but we haven't waited to see that happen to take some action. Some of the things we're focused on right now that Steve is leading and that I am leading, have to do with reducing our fixed cost.

We're looking at -- we're continuing to -- we actually increased our focus on real estate, looking at other areas in the organization where we can channel money from fixed expense towards revenue generating areas and increase our variable expense structure as we reduce our fixed expense structure. So we are doing that now. In the event that we saw a slow down, we would take the actions you would expect in terms of reducing some of the more discretionary items in the organization. We would not cut in innovation; we would not cut many of the sales growth initiatives we're focused on. But we believe that there is still plenty of room in the F and O.

Kevin Buttigieg - Stanford Group

Thanks very much.

Operator

Thank you. Our final question today will be from Abhey Lamba with UBS

Abhey Lamba - UBS

Yeah hi, thank you. Can you hear me?

Bob Beauchamp

Yes. We can.

Abhey Lamba - UBS

Okay. Thanks. Just to follow-up on that, Bob, you mentioned you have a contingency plan and you would do that. Do you expect that to only focus on your cost structure or are you also thinking of on the revenue side, also updating guidance of updating numbers from that?

Bob Beauchamp

Well, I'm not sure I understand your question. I think that if we were -- if we saw the economy slowing our business, we would tell you. And we would -- and so that would -- we would adjust at that point. We feel no need to do that at this point. We are mindful of it and we're keeping an eye on it. There is certainly enough discussion on it and we've seen other technology companies in different parts of the market react to it. But we've seen other vendors who are similar to us doing quite well in this.

And I think that we just happen to be in a very good place in a relative basis for what people are looking to spend money. But if it were to turn down, we would notify you of that, and we would adjust both the cost structure and some of our priorities internally to adjust to that. And I think we're in a good position to weather that if that were to happen.

Abhey Lamba - UBS

Good, thanks. And, lastly, can you talk a little bit about what will be the drivers of margin improvement in the ESM segment and how should we think about those margins for the rest of the year? Thank you.

Steve Solcher

On the margins and the ESM segment, we just finished 7% for the first quarter throughout the rest of the year. They are going to improve. You know, you should expect the MSM margins to slightly improve and the ESM margins to probably almost double by the time that we end the full year. So you're looking at double the margin percentage within the ESM unit. So that would indicate that the latter half of the year it's actually going to be higher than the mid-teens. Where it's coming from is just about every area. Cost of professional services -- our plan is to make money in professional services.

That swing alone is going to probably be a point to two points of margin improvement over the prior year. It's also to Bob's point selling and marketing efficiencies, G&A efficiencies. There isn't anything that's not going to be touched.

So it's both the revenue rate as well, as are we building a platform that scales, and we believe we are.

Abhey Lamba - UBS

Thank you.

Operator

Mr. Beauchamp, I'll turn the call back to you.

Bob Beauchamp

Alright. Well in summary, we want to thank you all for joining us. Steve and I will be able to work with you in questions. We are very happy with the results of this quarter. We're excited about the strong growth we've delivered in our product areas, the changes that we're making in our organization, the energy that the company has. I will tell you that the energy surrounding the sales organization and some of the things happening there are some of the most positive things I've seen in this company in 20 years. And things that we believe will add to excellent execution for the months and years ahead. Thank you for joining us.

Operator

Thank you. That concludes today's conference call. Have a pleasant day.

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