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TIBCO Software Inc. (NASDAQ:TIBX)

F3Q08 Earnings Call

September 25, 2008 4:30 pm ET

Executives

Vivek Ranadivé – Chairman and Chief Executive Officer

Murray Rode – Executive Vice President and Chief Financial Officer

Analysts

Analyst for John DiFucci – JP Morgan

Derek Bingham – Goldman Sachs

Tim Klasell – Thomas Weisel

Nabil Elsheshai - Pacific Crest Securities

Katherine Egbert - Jefferies & Co.

Brent Williams – Benchmark Company

Operator

Welcome to TIBCO’s third 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 revenue, 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 yet been prepared in accordance with generally accepted accounting principles as we believe that such information is useful for understanding our financial condition and results of operations. For a presentation of the most directly comparable financial measures calculated in accordance with GAAP and a reconciliation of the differences between the non-GAAP and GAAP financial information, please see our website at www.tibco.com.

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

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

Vivek Ranadive

We appreciate you joining us on our Q3 earnings call. On today’s call I’ll do three things. One, review our Q3 performance. Two, discuss the opportunity of TIBCO amidst a volatile market environment. Three, briefly comment upon our outlook going forward.

Let me start with our Q3 performance. Total revenues of $162.3 million resulting in year-over-year growth of 20%. License revenue was $67.5 million, up 28% on a year-over-year basis. Fully taxed non-GAAP earnings per share for the quarter were $0.11 versus $0.06 a year ago.

Year-to-date we have generated cash flow from operations exceeding $114 million, up 60% on a year-over-year basis and representing an amount greater than we generated for all of last year.

During Q3 we completed 101 deals of $100,000 or greater in license revenue versus 89 in the year-ago period. Customer win examples in the quarter include Autodesk, BMC Software, Embratel, Energy Australia, Eni S.p.A., KPN, Ontario Teachers’ Pension Plan Board, State of Ohio Job Family Services, TD Ameritrade, Toshiba and Urban Outfitters.

Our performance was strong across the board as follows: Each of our major regions in Americas, EMEA and Asia Pacific delivered 20% year-over-year total revenue growth. The appeal of our unique middleware platform continues to deflect itself across a growing array of industries. Just this past quarter our government related revenue was up 134%. Energy related revenue was up 78%. Telco revenue was up 61% year-over-year. Even from financial services we were up 5% year-over-year.

From a product perspective we saw growth in key areas of our overall product portfolio. SOA related revenue grew by 5% year-over-year but grew by more than 20% quarter-over-quarter driven in large part by accelerating adoption of our active matrix platform.

BPM related revenue grew 36% year-over-year and business optimization grew by 88% year-over-year driven largely by our growth in our business events products which is our industry-leading complex event processing technology. This product continues to see accelerating demand and drive sales cycles. In fact, a recent report by IDC listed TIBCO as the number one market share leader in complex event processing, substantially ahead of IBM and with more share in fact than our next three competitors combined.

Regarding the broader economy we are all aware of concerns about the ongoing credit crisis and the associated volatility in the markets. All this volatility and turmoil will only accelerate another trend at work in enterprise IT that I have been talking about for some time; the old request/reply database oriented architectures of the past are being supplanted by event driven, service based architectures that execute in memory rather than with slower, static databases.

The event driven approach is the only way to cope with volatility, volume and the speed of today’s business challenges such as we have seen in financial services. Recent developments in the market only underscore the need for an end-to-end infrastructure platform that is capable of making an enterprise intelligently aware of and responsive to a complex myriad of events as they change in real time. Whether it is a matter of compliance, a tool to better manage risk or a means to which better service your customers. We call this being event driven.

TIBCO is unique because we are the only enterprise software company that can provide the whole platform to make a company event driven. So what do I mean by providing the whole platform?

The essential ingredients are: One, a highly scalable enterprise service [inaudible]; Two, rapidly configurable infrastructure applications that are enabled by the service spots and can run in memory and three, neutrality that allows the integration of legacy systems, cloud computing, proprietary applications and new developments.

TIBCO stands alone in providing these assets and it is for this reason that we are the leading pure-play infrastructure software provider for the enterprise.

In closing, as we look to Q4 and end of year we continue to see an enormous amount of opportunity. As such we will continue our hiring plans for added sales capacity to meet customer demand while at the same time squeezing leverage out of the business wherever possible and we look forward to updating you again in a few months’ time.

Now I’ll turn it over to Murray to provide some additional detail of the quarter’s performance and outlook.

Murray Rode

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

Some data on our third quarter results are as follows: Total revenue was $162.3 million, up 20% year-over-year. License revenue was $67.5 million, up 28% year-over-year. Services and maintenance revenue was $94.8 million, up 15% year-over-year. Non-GAAP gross margins were 75%, up from 72.6% last year. Non-GAAP operating income was $28.7 million resulting in an operating margin of approximately 18% versus 12% a year ago. Non-GAAP EPS was $0.11 versus $0.06 a year ago and GAAP EPS was $0.06 versus $0.02 a year ago.

The non-GAAP effective tax rate for the quarter was 33%. Deferred revenue was $141 million including both long and short-term components. This is up about 13% from Q3 a year ago although down sequentially from Q2 due to the timing of when maintenance renewals came due. We currently expect to end the year up by 6-8% on the total deferred revenue balance.

DSO’s came in at 61 days, down sequentially from Q2 and down 15 days year-over-year. We had cash flow from operations of $22.5 million which compares with $19.3 million last Q3. This brings year-to-date cash flow to $114 million versus $72 million for the year-ago period.

We ended the quarter with approximately $280 million in cash and short-term investments with also having repurchased three million shares at an average price of $8.31 per share.

The geographic breakdown of revenue was as follows: The U.S. represented 54% of total revenue, Europe 36% of total revenue and Asia Pacific 10% of total revenue.

Total revenue by vertical was as follows: Financial services 21%, Telco 15%, energy 10%, government 9%, manufacturing 5%. No other industry represented more than 5% of revenue.

Given the ongoing upheaval on Wall Street it is important to note several things about our financial services related business. First, we continue to have business in this industry sector despite the turmoil and have for some time now. Second, our financial services business has been most focused on retail banking and other non-investment banking related areas for the last couple of years so we expect to have relatively little exposure going forward to what has been the hardest hit part of the sector; investment banking. If we look at the specific names hardest hit we have little to no exposure. Third, times of stress can represent opportunity for our software especially in financial services as firms seek more sophisticated ways to analyze the events that drive their business, more robust compliance systems and real-time risk management.

In addition, consolidation of companies often means new opportunities as we believe to be the case with Bear Stearns becoming part of JP Morgan.

Turning to our license revenue in the quarter the approximate breakup by product family was as follows: SOA 52%, business optimization 35% and BPM 13%. Our top 10 customers represented 22% of revenue versus 23% a year ago and we have 14 deals over $1 million in license. License deals over $100,000 rose to 101 versus 89 in the year-ago period. For license deals over $100,000 the average deal size was approximately $615,000 versus $541,000 a year ago and $583,000 in Q2. We added 48 new license customers in the quarter versus 46 in the prior quarter.

On sales headcount we ended the quarter flat with Q2 but expect that number to quickly approach 180 as some recent hires come on board. Also of note, we closed our acquisition of Insightful Corporation on September 3, which we expect to be particularly complementary to our business optimization product family.

Turning to our outlook for the business, we remain positive on our long-term prospects for growth. Having said this one clearly has to acknowledge uncertainty in the general macro economic environment. So, we are going to continue to be cautious in how we manage our business in the short-term. Looking at our finish to the year we are now expecting to slightly exceed our previous annual revenue target with Q4 total revenue in the range of $193-202 million. We are generally maintaining closer guidance on license revenue and expect Q4 license revenue to range between $97-106 million.

The non-GAAP gross margin for the quarter is expected to be about 78% with a non-GAAP operating margin between 25-27%. Non-GAAP EPS for the quarter should range between $0.18 and $0.20 which keeps us in line with our full-year and original EPS guidance of $0.43 to $0.45 for the year.

Q4 GAAP EPS should range from $0.12 to $0.15. Our EPS estimates assume a fully diluted share count of approximately 183 million shares. We now expect to finish the year with an increase in total cash flow from operations of approximately 20%.

With that Vivek and I will be happy to take your questions.

Question-And-Answer Session

Operator

(Operator Instructions) The first question comes from the line John DiFucci – JP Morgan.

Analyst for John DiFucci – JP Morgan

Just a couple of quick questions if I may. Murray I believe you said deferred revenues were down sequentially due to timing of renewals. Just looking back on the last few years, Q2 to Q3 sequential was pretty much flat so if you could provide a little more color into the exact nature of some of that timing issue and clarify if there were any issues with respect to some of the financial services companies, if you had to take some write downs there or if it was a currency issue?

Murray Rode

Kind of dealing with the components of your question in reverse order, there was no issue with write downs this quarter or with currency impacts. The fundamental issue was the timing of how these maintenance renewals come due. There can be variations even as little as a day or two that makes a difference between that maintenance renewal being in your deferred balance or not for the quarter. So I think if you do look at the pattern of deferred revenue this year versus past years it has been a little different and we have seen a bigger ramp in the first half. So, we are seeing maybe a little more seasonality this year than we have seen in past periods. Again, just because of those timing differences and as I said relatively small timing differences.

Analyst for John DiFucci – JP Morgan

On the financial services exposure I think you said it was 21% in the quarter. Perhaps you could provide a little more visibility on that given the concerns that people may have as far as the split on new license revenue versus aggregate revenue of financial services exposure.

Murray Rode

We don’t really break out by the verticals or the regions the license revenue specifically but again, I understand some of the sensitivity to that. Given the sensitivities we have relatively little contribution from financial services. So it was a lot less than the total revenue contribution to license. Even within that I don’t believe there was any, as I talked about in the prepared remarks, any investment banking related financial services revenue. It was primarily retail driven.

Operator

The next question comes from the line of Derek Bingham – Goldman Sachs.

Derek Bingham – Goldman Sachs

Murray, from last quarter you had mentioned some of the biggish deals that had slipped out of the quarter and I was wondering if you could give us some color? You gave us some color at that point of what had closed and some stuff as well you had hoped to close. Maybe give us a sense for kind of what you considered from this quarter’s stuff that came out of last quarter just so we have the proper sense of seasonal trends here?

Murray Rode

Sure. A couple of things on this. One, I would say keep in mind that in any given quarter we have business that carries over from quarter-to-quarter out of the pipeline. When we have a shortfall like we did last quarter we tend to give more color about that carryover but this sort of carryover occurs all the time so I wouldn’t want to overstate its effect on Q3. The second thing, what we did talk about was built into our expectations for the quarter so when we came out of Q2 we talked about $10 million or so in license revenue that slipped, nearly $4 million of which had closed by the time of the Q2 conference call and another $4 million or so which we expected to get in the quarter and we did get in the quarter. So that left another $2-3 million really that continues to exist in our pipeline.

Vivek Ranadive

I think the thing that we had said is that we now had a pricing power we didn’t have in the past and we were unwilling to give on pricing. That pushed some deals out and I think what I’m happy to say is that we ended up prevailing in those instances and we were right in terms of our feeling about maintaining the pricing.

Derek Bingham – Goldman Sachs

I wonder if I can ask one more on active matrix and it sounded like you are pretty pleased with how that is starting to take off and I wonder if you could just give us a little bit more detail? Whatever you can about what you are seeing there and what kind of adoption you are seeing.

Murray Rode

It is becoming much more core to our SOA platform sale. So, we had said all along we expected active matrix to take a little while to really catch on and become a more central part of what we sold in terms of our SOA offering and so we are really just seeing that up take. We are seeing it show up in more deals more pervasively and as I say becoming a more central element of what our SOA solution is.

Vivek Ranadive

Derek, I am actually a little surprised at how educated the market is in wanting this kind of a platform and it is not at all an evangelical sale. It is something everyone wants.

Operator

The next question comes from the line of Tim Klasell – Thomas Weisel.

Tim Klasell – Thomas Weisel

A quick question here around guidance. If I take about the mid-point of your guidance it is about a 50% sequential up tick. You guys have clearly been doing at least that the last few years. But with all the storm clouds out there and what have you are you sort of assuming a little bit lower of a close rate than you have seen in the last few years to get to that 50% because of maybe skittishness inside the customer base?

Murray Rode

No, Tim, we are not. When it comes to close rates we are actually thinking close rates appear to be pretty much what they have been. I think to the point about us being a little bit more conservative on Q4 guidance it is more just what we are assuming we are going to be closing. So we are just being more conservative on overall waiting in the pipeline.

Vivek Ranadive

There are two parts to the question. One is are you being a little more conservative and the answer is yes. The second part is are you seeing skittishness on the part of customers. For some reason we are not. So yes we are being more conservative but we are not seeing that skittishness.

Tim Klasell – Thomas Weisel

It sounds like you are wrapping the sales force headcount but I am assuming it would be safe to say most of these ads are going to be integrated into the sales force after the close of your fiscal and sort of you are priming the pump for next year. Is that a safe assessment?

Murray Rode

Headcount we add this quarter. Flow to headcount we add this quarter. I mean obviously their primary impact is going to be next year. In some of these cases some of these people may still add to the quarter if they get added in the next couple of weeks.

Tim Klasell – Thomas Weisel

Finally, just sort of going over the products obviously I think they are aghast about active matrix but how are some of the pipelines for some of the other products? Can you give us sort of a feel for where you are seeing extra traction?

Vivek Ranadive

I think the quarter we had is reflected in seeing a similar pattern in the pipeline and we are seeing very, very strong growth in the complex event processing business events area. We saw growth in BPM. We saw it across the board but the whole concept of events is on fire right now and we continue to see a very strong pipeline in that.

Operator

The next question comes from the line of Nabil Elsheshai - Pacific Crest Securities.

Nabil Elsheshai - Pacific Crest Securities

On the SOA front I know for a long time it was having trouble taking off in terms of becoming beyond the experimental stage of projects. Would the success you are talking about with active matrix indicate you are seeing the maturation of it or where are we in that phase of adoption?

Murray Rode

We are in the sense that I think as Vivek mentioned a moment ago there is not so much missionary selling as there might have been a year or two ago about what SOA is. I also think you see people being a lot more pragmatic about what they are trying to achieve with SOA and our platform approach where the infrastructure can make a company event-driven, can tie in legacy assets, can help bridge them to the new world of services all in kind of an economical way I think is really what people respond to with our products.

Vivek Ranadive

Also some of what we call infrastructure applications, whether it is fraud detection or inbound marketing…there is a whole range of event-driven applications that you simply can’t do with a request/reply database platform. So that is driving more SOA business as well.

Nabil Elsheshai - Pacific Crest Securities

So in the case of the complex event processing and some of the active matrix stuff the deals are tied together or are those separate types of applications?

Vivek Ranadive

They could be separate but you need a real-time SOA infrastructure in order to fully build a CEP type application so the two are related as well.

Nabil Elsheshai - Pacific Crest Securities

I guess what I’m asking is are you selling those two things together? I mean is CEP pulling through active matrix or vice versa or what are you seeing there?

Vivek Ranadive

We are selling them separately but obviously there are customers who buy them both.

Nabil Elsheshai - Pacific Crest Securities

On CEP what kind of opportunity are we talking about there? Obviously 83% is great growth but is this still a niche market?

Vivek Ranadive

No. This is the future. This is how every application develops. Basically every application needs to be event-driven. This is why the guys at IBM, Steve Mills and Paul Bazzano talk about it. This is why everyone is talking about it because this is the future. We saw a transition from mainframes to client server and now you are going to see a transition from client server to event-driven and CEP is the cornerstone of that.

Operator

The next question comes from the line of Katherine Egbert - Jefferies & Co.

Katherine Egbert - Jefferies & Co.

Can you give us an update on what you are seeing from Oracle now that they are a ways into the BEA integration?

Vivek Ranadive

We don’t see the competitive profile as having changed. If anything it is more favorable to us because now customers are discovering that BEA is, to use a political slogan, more of the same. So it is a point-to-point server based approach. They thought they were going to get this real-time middleware which they didn’t get so now they are back to the drawing board, refocusing on the whole fusion initiative.

So our big competition continues to IBM.

Katherine Egbert - Jefferies & Co.

Can you tell us what products or what geographic areas you are assigning the newer sales people to?

Murray Rode

It is actually all over the place. There are some additional ones in North America, some in Europe and a little bit in Asia Pacific. So it happens to be almost proportional to our revenue run rate.

Katherine Egbert - Jefferies & Co.

Any specific product areas that you are putting these people on?

Murray Rode

Not really. We are pursuing a strategy this year where we are segmenting a little bit to have more junior sales people focus on a smaller set of the product portfolio but still pretty much a geographically based sales force.

Katherine Egbert - Jefferies & Co.

Can you just give us a sense given your cautiousness and the environment, how big is your pipeline relative to the quarter and relative to August and relative to the past November’s?

Murray Rode

Pipeline is tracking quite similarly really to past quarters and past years.

Operator

We have a follow-up question from the line of Analyst for John DiFucci – JP Morgan.

John DiFucci – JP Morgan

This is John DiFucci. I’m sorry I joined a little bit late. A lot going on. Murray and Vivek you seem to be doing better than you have as a company at other times when things have been softening out there. I’m just trying to figure out what seems to be different out there. You do have a broader product portfolio today. Also a follow-up to Katherine a little bit with Oracle and BEA sort of joining forces…I’m just curious I’m out at Oracle world and they put a slide up there today and they had four companies on the slide for middleware and it was Oracle, IBM, Microsoft and TIBCO. So you are in good company up there but it is sort of odd to see you up there with those other three. Is that it? Is it sort of TIBCO as the last remaining neutral vendor up there that even in a difficult environment where you don’t get the type of financial services support that perhaps you normally do where the rest of the world is sort of leaning your way because you are the last pure-play out there that is totally focused on doing what you do?

Vivek Ranadive

I think there are two parts to that. One is what you say, which is we kind of are the neutral safe haven for everyone to come to. Certainly that is the case and we are the last one left. But there is something more happening here and I urge everyone to give that some thought which is that there is a shift, just as there was a shift from the mainframe era to the client server era there is a shift and it is happening and it is happening now where people are moving to this highly distributed event-driven architecture. To have event-driven applications you can’t be running off a static database. The database will still continue but it will be just as the mainframe still continues.

So there is this shift taking place and we have the platform to drive that shift. That is why one of the things I thought was significant was when we were able to hold our price points last quarter and sure it meant some deals slipped but we ended up getting those deals and we ended up getting them at the price we thought they should be at.

So there is something very fundamental going on over here which is companies are shifting to the architectures that people like Amazon, Google and companies of that ilk have. Mainstreams are shifting to that. We have that. So we have the full product set in a way that we never have. But the realization to be event-driven you can do it. They have tried doing it off app servers and databases and all of that stuff and it hasn’t worked. I wasn’t there at Oracle but I would be surprised if they didn’t acknowledge that basically they have to kind of rebuild around fusion.

So that is kind of a mouthful but that is what we think.

Operator

The final question comes from the line of Brent Williams – Benchmark Company.

Brent Williams – Benchmark Company

A couple of questions focusing on the CEP product area. Can you give me a sense of the percentage of that business that is going into financial services today? I’m not really asking in terms of the macro picture in the sector but just in terms of other people we talk to in CEP are really focused on that area but they are trying to broaden it out. Can you give us a sense of how you have developed in that area in the last couple of quarters?

Vivek Ranadive

It is one of those areas where there is so much low hanging fruit that pretty much any place we go we find opportunity. Now as it turns out most of it has been focused in areas like Telco so it has been in other areas. But we are getting a lot of calls from banks. They want to use this for fraud detection, for compliance and for risk management so we are seeing opportunities across the board. Telco, government, energy, we are seeing them everywhere. This is the future and everyone is going to shift to this.

Brent Williams – Benchmark Company

Let’s see, if I look at the smaller vendors other than IBM, has there been any sort of shifting in who you are seeing on the more start-up side on the CEP business?

Vivek Ranadive

No, we are not really seeing anyone.

Brent Williams – Benchmark Company

I’m interested in 3.0 you added distributive capability which sounds pretty cool. Is that an extra cost item? What kind of up charge would that be and by the way sort of related, where is the deal size now for CEP relative to your standard SOA sale?

Murray Rode

We do take a kind of bundling and component strategy with CEP where some things are included in the bundle and as we add some of these features we charge for them as add on’s. In terms of deal size, CEP so far the business events related deals tend to track higher. I don’t immediately have the number at hand but it is significantly higher than our average deal size for deals over $100,000.

Vivek Ranadive

Thanks everyone. We will now conclude this call. Thanks for joining us and we’ll see you on the next one.

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