BMC Software's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: BMC Software, (BMC)


Q4 2012 Earnings Call

May 09, 2012 5:00 pm ET


Derrick Vializ - Vice President of Investor Relations

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

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


Philip C. Rueppel - Wells Fargo Securities, LLC, Research Division

Philip Winslow - Crédit Suisse AG, Research Division

Robert Chen - Citigroup Inc, Research Division

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


Good day, everyone, and welcome to today's BMC Software Fourth Quarter Fiscal Year 2012 Earning Results Conference. Today's call is being recorded. At this time for opening remarks, I'd like to turn things over to Mr. Derrick Vializ. Please go ahead, sir.

Derrick Vializ

Good afternoon, everyone. I'm Derrick Vializ, Vice President of Investor Relations, and I would like to thank you for joining us today.

During our call, Bob Beauchamp, our Chairman and CEO, will provide an overview of the fourth quarter fiscal 2012 performance of both our company and business units and update you on recent initiatives. After that, Steve Solcher, our CFO, will provide additional financial and operational detail. Bob will then discuss and provide our expectations for fiscal 2013 before we open the call to questions.

These prepared comments were previously recorded. This call is being webcast, and a complete record of the call will be made and posted to our website. In addition to today's earnings press release, we have posted a presentation which we will refer to at various times during the call. Both of these documents are available on our Investor Relations website at

Before we continue, I would like to remind you that statements in this discussion, including statements made during the question-and-answer session regarding BMC's future financial and operating results, particularly statements and views regarding fiscal 2013, the development of and demand for BMC's products, BMC's operating strategies, acquisitions and other statements that are not statements of historical fact are considered forward-looking statements. These statements are subject to numerous important factors, risks and uncertainties which could cause actual results to differ from the results implied by these or any other forward-looking statements.

Cautionary statements relative to these forward-looking statements and BMC's operating results are described in today's earnings press release and in our annual report on Form 10-K. All of these documents are available on our website. These forward-looking statements are made as of today based on certain expectations, and we undertake no obligation to update these forward-looking statements.

I would also like to point out that the company's use of non-GAAP financial measures is explained in today's earnings press release, and a full reconciliation between non-GAAP measures and the corresponding GAAP measures is provided in the tables accompanying the press release and at

Now I'll turn the call over to Bob.

Robert E. Beauchamp

Good afternoon, everyone. I'm pleased to report that BMC Software ended fiscal year 2012 on a strong positive note with renewed momentum in several key areas.

During the quarter, we saw our ESM business regain positive momentum. We generated solid sequential growth of 21% in ESM license bookings. We aggressively grew our cloud and Software as a Service, SaaS, businesses with a large number of new wins. Our Numara acquisition is performing above expectations. We expanded key alliances to create go-to-market leverage. We made further progress to improve sales execution, including numerous steps taken to address sales attrition, and our tenured and overall ESM sales force capacity, excluding Numara, is up, finishing the year with 20% more total sales capacity than at the beginning of fiscal 2012.

Our MSM business unit also performed well in the fourth quarter. We grew the run rate of bookings in our top 15 MSM transactions overall, largely due to our success in selling more new products into those relationships. And our Control-M workload scheduling products continue to see healthy growth as a result of our technology leadership in that space.

Our Global Services business also generated strong growth during the quarter. Demand for private and hybrid cloud solutions as well as overall BSM transformational programs remained high, with positive impact on the number and scope of our services engagements. Signing several large long-term services engagements with key customers positions us well entering fiscal 2013, and ongoing efforts to certify consultants and partners with BMC solutions has created a growing overall ecosystem and led to success in a number of high-profile BSM implementations with major customers.

Looking back over the past 12 months, we also worked through our share of challenges. But over the course of the year, we once again delivered growth on several of our key metrics. Revenue rose 5%. Non-GAAP operating margin increased to 36%. Non-GAAP diluted EPS was up 9%, and cash flow from operations grew 5% to $800 million.

During fiscal 2012, we took a number of important steps to strengthen our position in the marketplace, including the significant expansion of our sales force capacity. Overall market conditions plus the progress we made in addressing our fiscal 2012 challenges makes us feel good about our prospects going into fiscal 2013.

At the core of our outlook is what we believe to be a unique and differentiated strategy to build value for customers by providing the most comprehensive, heterogeneous, integrated IT management platform to enterprises of all sizes around the world. Our integrated management platform helps organizations dramatically reduce their IT operating costs while improving their agility and their quality of service.

We believe that successfully delivering on this strategy will drive customer value that leads to better financial performance and total shareholder returns. Customer demand for such a platform is growing across geographic borders and market boundaries. That's because the pressure for IT to deliver improved performance at lower cost for the business has never been greater.

Given this demand, we see great opportunities for our solutions ahead. We see a significant competitive advantage by delivering an IT management platform that manages services that span across physical, virtual and hybrid environments. We see the same type of advantage for our management platform that is capable of integrating a myriad of third-party vendor hardware and software offerings. Today, none of our competitors come close to matching the breadth and depth of the management platforms that BMC offers. That's one major reason why we continue to win a growing number of larger, multi-disciplined ESM wins. The number of multiple disciplined ESM wins over $1 million in license bookings was up over 10% in fiscal 2012 compared to the previous year. It was up over 40% in the past 2 years.

Customers like Frontier Communications, Logic Australia, the U.S. Navy and the Department of Homeland Security selected our integrated IT management solutions as their platform for delivering IT-enabled services required by their businesses.

As we have discussed before, the shift to cloud computing and the added complexity it brings to IT organizations is a major driver for demand for IT management. A recent commissioned research survey conducted by Forrester Consulting on behalf of BMC underscores these trends. It confirms the growing demand for cloud services and also signals the growing tensions between IT and business stakeholders in how they access the cloud. The solution: enterprises need a comprehensive integrated management platform to support any infrastructure in the cloud, now and in the future.

That's exactly what we offer. It's why during fiscal 2012, we saw an increase in the number of cloud wins and cloud-related license bookings. We're proud to say that a wide range of companies are using our cloud management solutions, and we delivered our best quarter ever for cloud solutions.

A couple of outstanding wins include Foxconn, a multinational electronics manufacturing company, and América Móvil, the largest telco service provider in Latin America. América Móvil chose our entire cloud and BSM platform over 2 of our largest competitors.

During fiscal 2012, the number of cloud transactions doubled year-over-year, increasing 130%, and cloud-related license bookings increased 70% in fiscal 2012 versus fiscal 2011.

Software as a Service is another key area of growth for BMC. As you know, we have 2 primary SaaS offerings: BMC's Remedyforce and Remedy OnDemand. Both offerings are accelerating rapidly. For Remedyforce, which is marketed directly and through, we announced our 100th Remedyforce customer in November after approximately 300 days of product availability. But by the close of fiscal year, we had reached 200 customers.

Throughout fiscal 2012, we saw acceleration in our Remedyforce customer growth, with a number of new customers gained in each quarter increasing sequentially through the year. A large-seat license win for Remedyforce was E*TRADE financial, where we beat out another prominent SaaS vendor to win the deal.

Remedy OnDemand also continues to do well. I want to remind you that the deal sizes for this offering tend to be much greater than for our Remedyforce offering. By the end of the year, we had nearly 100 customers with this offering. In addition, I'm pleased to announce that after 15 years of collaboration, BMC and Capgemini have recently signed a strategic infrastructure services partnership agreement which will provide the majority of Capgemini outsourcing clients in Europe the option to move onto BMC's Remedy OnDemand platform. The agreement, which includes a joint go-to-market strategy, will enable Capgemini to enhance its service management business and positions both companies for significant growth in the service integration marketplace. This partnership positions BMC to be the largest ITSM SaaS vendor in EMEA and to further grow our Remedy OnDemand footprint in the future. It also demonstrates the power and potential of our alliances to expand our reach and footprint.

Over the course of the past year, we have described some of these alliances to you, such as our partnership with VCE, Dell and Cisco, and this will continue to be a key focal point going forward.

Let me next update you on our recent acquisition of Numara. Our integration efforts have been tracking according to plan, and to date, Numara is performing ahead of our expectations. We're very excited about the strategic capabilities Numara has brought to us for multiple reasons.

This acquisition has tripled our install base of active help desk, ITSM and IT asset management customers. Additionally, the Numara acquisition brings an experienced management team and the sales and channel capabilities required to serve the medium-sized enterprise market. This represents a substantial expansion of the opportunities available to us for our ITSM solutions, including our SaaS offerings such as Remedyforce. We're very pleased with our early progress with Numara.

Next let's discuss our MSM business, which enjoyed a very solid fiscal 2012. MSM bookings overall rose 6% year-over-year. As noted, we continued to see growth in the annual spin rate of our top 15 MSM transactions in the fourth quarter. During the year, we added or expanded our relationships with new and existing customers with approximately 550 new product placements for MSM.

In the fourth quarter, we expanded our relationship with customers like El Corte Inglés and Westpac Banking. We also saw strength in workload automation, which includes our BMC Control-M product line. Enterprise workload automation represents over 1/3 of our MSM business.

For the year, we added 88 new BMC Control-M customers, often displacing competitors, and expanded our existing relationship with over 300 new product placements. Some key workload automation wins in the fourth quarter included Capital One, Fujitsu Management Systems and Deutsche Börse.

The mainframe business offers a very good opportunity for us. Our ability to capitalize on these opportunities is reflected in the customer surveys we regularly conduct. Customer satisfaction with BMC solutions is at a record high level. We intend to leverage our strong brand to generate further success in this space.

We're also very pleased with the success of our Global Services business. For the quarter, Services revenue grew 10% year-over-year, and for all of fiscal 2012, it was up 21% compared to fiscal 2011. We successfully delivered a number of high-profile BSM implementations over the past year and began many more. Many of our customers tell us that their BSM programs are critical to the future of their business, and they are increasingly looking to BMC for strategic advice on managing change and implementing best practices.

To respond, we have placed an increasing emphasis on architectural consulting, customer education and global program management within our services organization. This has the added benefit of driving earlier customer value realization for BSM projects, which in turn leads to more rapid follow-on purchases for both software and services. We also continue to train and certify partners wherever possible to grow the ecosystem of companies focused on BMC solutions.

So that gives you a snapshot of our strategy and performance during the fourth quarter and the fiscal year. It was a year during which we built a stronger foundation for the opportunities that lie ahead. We stayed focused on our strategy and our vision, which continued to set us apart in the IT management marketplace. We enhanced our technology leadership in BSM, including the acquisition of Numara, which tripled our install base of active help desk, ITSM and IT asset management customers.

We work to strengthen our distribution and direct sales team and ended fiscal 2012 with 20% more total ESM sales capacity, excluding Numara, than when we entered it. The progress here is evidence of our efforts to address our well-documented fiscal 2012 challenges to improve sales force capacity and productivity, and it puts us in a much-improved position as we enter fiscal 2013.

Through our new and expanded initiatives and alliances with partners including Capgemini, Dell, VCE, Cisco and, we are able to reach more customers with more solutions than ever before. We are gaining recognition as the IT management platform of choice for enterprises around the world with a number of multi-disciplined ESM deals over $1 million in license bookings, up over 10% in fiscal 2012.

We are broadening the capabilities of our cloud and SaaS solutions and are gaining scale in their adoptions with new cloud wins nearly doubling year-over-year, and we now have over 300 SaaS customers.

Our MSM business remains the leader in its market, including over 300 new product placements for our Control-M solution, and our Global Services business continues to grow its capabilities with 21% revenue growth in fiscal 2012. All of this paves the way for a solid fiscal 2013.

I'll come back and discuss our outlook with you after Steve reviews the quarter and year in more detail. Steve?

Stephen B. Solcher

Thank you, Bob. I would like to start by adding to Bob's comments about our performance for the quarter and the fiscal year.

I am pleased with how we finished the fiscal year across several of our key financial metrics as well as the overall performance across our businesses. Despite the challenges we faced throughout the fiscal year, we grew non-GAAP operating income for the year by 6%, non-GAAP diluted earnings per share by 9% and cash flow from operations by 5%.

During the fourth quarter, we showed strong sequential improvement in our leading indicators as we grew total bookings 29% and ESM license bookings 21%.

In the fast-growing markets of cloud and SaaS, we saw strong momentum. In the fourth quarter, our SaaS bookings nearly tripled and our cloud-related license bookings nearly doubled on a year-over-year basis.

Our MSM business had another strong quarter and finished fiscal 2012 with solid bookings growth of 6% with numerous new product and customer wins.

Our Global Services business posted another profitable quarter and grew revenue by 21% for the full year. The improvement and momentum we demonstrated in the fourth quarter bodes well for us as we enter 2013.

With that, let me review our financial results for the fourth quarter and full fiscal year in more detail.

Non-GAAP operating income was $180 million, down 9% from the fourth quarter of last year. Our fourth quarter non-GAAP operating margin was 32%, down 3 points from the year-ago quarter. For the full year, we achieved non-GAAP operating income of $780 million, an increase of 6% over the prior year. Non-GAAP operating margin for fiscal 2012 was 36%, up 1 point from fiscal 2011.

Please refer to Slide 5 in our presentation for selected non-GAAP financial information, which includes segmented reporting of our ESM and MSM business units.

ESM's non-GAAP operating income in the fourth quarter declined to $58 million, down 14% from the year-ago period. ESM's non-GAAP operating margin decreased year-over-year by 3 percentage points to 16%.

For the fiscal year, ESM's non-GAAP operating income increased 1% to $282 million. ESM's non-GAAP operating margin decreased by 1 percentage point in fiscal 2012 to 21%.

MSM's non-GAAP operating income in the fourth quarter was $122 million, down 6% from the year-ago period, and its non-GAAP operating margin decreased 3 percentage points to 58%.

For the fiscal year, MSM's non-GAAP operating income was $497 million, up 10%, and it's non-GAAP operating margin was 60%, up 2 percentage points compared to the year ago.

Our non-GAAP net earnings for the fourth quarter were $123 million, down 13% from the fourth quarter fiscal 2011. Non-GAAP diluted earnings per share for the quarter was $0.74 per share. This reflects a non-GAAP effective tax rate for the quarter of 30%.

For fiscal 2012, non-GAAP net earnings were $562 million, an increase of 3% compared to fiscal 2011. Non-GAAP diluted earnings per share for the year was $3.25 per share, up 9% compared to the prior year. This reflects a non-GAAP effective tax rate for fiscal 2012 of 26.6%.

This higher-than-expected tax rate negatively impacted non-GAAP diluted earnings per share for both the fourth quarter and fiscal 2012 by $0.03.

GAAP operating income in the fourth quarter was $106 million, a decline of 25% from the fourth quarter of fiscal 2011. GAAP net earnings and diluted earnings per share were $71 million and $0.43, down 42% and 36%, respectively, from the year-ago quarter.

GAAP operating income in fiscal 2012 was $544 million, an increase of 2% from fiscal 2011. GAAP net earnings and diluted earnings per share for the fiscal year were $401 million and $2.32 per diluted share, down 12% and 7%, respectively, from fiscal 2011. GAAP net earnings in both fiscal 2012 and 2011 were positively impacted by the net income tax benefits of $6 million and $57 million, respectively, associated with tax authority settlements related to prior year's tax matters. These benefits are excluded from our non-GAAP results.

Our non-GAAP results reflect diluted shares outstanding in the fourth quarter of $166 million and for the full fiscal year, $173 million versus $182 million in both respective prior-year periods.

Turning now to bookings. Total bookings for the fourth quarter were $675 million, representing a decrease of 5% compared to the year-ago period. On a constant currency basis, fourth quarter bookings declined 3%. Total bookings for fiscal 2012 were $2.2 billion, flat as reported and on a constant currency basis compared to fiscal 2011.

The weighted average contract length for total bookings on a trailing 12-month basis was 2.39 years, up 10% from the year-ago period. After normalizing for contract length, trailing 12-month annualized bookings for the fourth quarter were $920 million, down 9% from the year-ago period. Please refer to Slide 7 in our presentation.

Now let me turn to the performance of each of our business units. Total ESM license bookings were $153 million in the fourth quarter, down 5% from the year-ago period but up 21% sequentially. For the fourth quarter, Numara contributed almost 4 points of growth to ESM license bookings.

Our SaaS business is best measured on monthly recurring revenue or MRR and on a total bookings basis. MRR represents the combined monthly value of subscription fees associated with our active customers. As of March 31, our SaaS MRR totaled $1.7 million, a 350% increase compared to a year ago, and total bookings for the year grew almost 250% to $26 million. SaaS subscription revenue is reflected within maintenance revenue in our income statement.

We continue to be pleased with the progress of our SaaS business and now have over 300 customers, with over 200 on Remedyforce. For fiscal 2012, total ESM license bookings were $506 million, down 11% from fiscal 2011.

Turning to the MSM business unit. Total MSM bookings for fiscal 2012 increased 6% to $895 million and had an average contract length of 3.4 years. After normalizing for contract length, total annualized MSM bookings for the trailing 12 months were $263 million, down 9%.

In fiscal 2013, we expect annualized bookings for the trailing 12 months to be up in the low double-digits. Since the timing of large transactions can impact bookings quarterly or annually, we also review the performance over a 3-year period, which is in line with our typical contract length. Over the trailing 36-month period, MSM bookings increased by 6% and annualized bookings were flat.

Turning to revenue. Total revenue for the quarter was $565 million, flat as reported and up 1% on a constant currency basis compared to the fourth quarter of fiscal 2011. ESM total revenue was up 1% to $354 million, and MSM total revenue for the quarter decreased 1% to $211 million.

Total revenue for the year was $2.2 billion, increasing 5% as reported and on a constant currency basis. ESM and MSM total revenue for the year increased 5% and 6%, respectively, compared to fiscal 2011.

License revenue in the fourth quarter was $234 million, down 7% from a year ago. ESM license revenue was $145 million, down 8%, while MSM license revenue was $89 million, down 5% from last year. For fiscal 2012, license revenue rose 2% to $878 million.

For the fourth quarter, maintenance revenue was $273 million, an increase of 6% compared to a year ago. ESM maintenance revenue was $151 million, up 9%, and MSM maintenance revenue was $123 million, up 2% compared to the fourth quarter fiscal 2011.

For fiscal 2012, maintenance revenue was up 5% to $1.1 billion. Professional services revenue, which is included in our ESM segment, grew 10% from the year-ago period to $58 million in the fourth quarter. Professional services revenue in fiscal 2012 increased by 21% to $214 million.

Moving next to operating expenses. Non-GAAP operating expenses in the fourth quarter were $385 million, up 5% from the year-ago period. Non-GAAP operating expenses for the year were up 4% from the previous year.

Looking at our business units. ESM's non-GAAP operating expenses for the fourth quarter were $296 million, up 5% from the year-ago period. The increase in ESM's non-GAAP operating expenses is primarily attributable to the inclusion of Numara for a partial quarter.

MSM's non-GAAP operating expenses were $89 million, up 6% from the year-ago period. For fiscal 2012, ESM's non-GAAP operating expenses were $1.1 billion, a 6% increase compared to fiscal 2011. MSM's non-GAAP operating expenses were $333 million, flat compared to the previous year.

Other income in the fourth quarter was a loss of $4 million. For the full fiscal year, other income was a loss of $14 million.

Now turning to the balance sheet. Total deferred license revenue at the end of the fourth quarter was $691 million, up 5% sequentially and 1% year-over-year. During the quarter, we deferred $129 million of license revenue or 48% of license bookings and recorded $98 million of deferred license revenue from the balance sheet. Total deferred revenue increased by $124 million sequentially to $2 billion. The current portion of deferred revenue now stands at 53%.

Software development costs as of March 31 were $245 million, as we capitalized $38 million and amortized $24 million during the quarter. For the fiscal year, we capitalized $145 million of software development cost and amortized $94 million.

Cash and investments total $1.6 billion with 40% of our cash held domestically. Our net cash position was $793 million at March 31.

In February of this year, we issued $500 million of debt securities in the public market with a 10-year maturity and 4.25% coupon. We intend to use the net proceeds from this offering for general corporate purposes, which may include share repurchases and acquisitions.

For the quarter, cash flow from operations was $213 million. For fiscal 2012, cash flow from operations was a company record, $800 million, up 5% from the prior year. During the fourth quarter, we repurchased 4.1 million shares of our stock for a total cost of $150 million. For fiscal 2012, we repurchased 19.2 million shares at a cost of $781 million. We have $850 million remaining in our current share repurchase program as of March 31.

In summary, I'm pleased with the progress and improvements we made in the fourth quarter. We are focused on building on this recent momentum in fiscal 2013 as we continue to invest in high-growth opportunities such as cloud and SaaS. We remain committed to enhancing shareholder value through our capital structure and aggressively returning cash to shareholders via our stock buyback program. We remain disciplined around our acquisition strategy, as demonstrated with our recent acquisition of Numara.

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

Robert E. Beauchamp

Let me provide you with our current expectations for fiscal 2013.

We expect non-GAAP diluted earnings per share in the range of $3.49 to $3.59 per share. At the midpoint, this would represent a 9% increase over fiscal 2012. This range excludes an estimated $1.07 to $1.12 per share for non-GAAP adjustments, including expenses related to the amortization of intangible assets, stock-based compensation and severance, exit costs and related charges.

The assumptions underlying our full year fiscal 2013 expectations include: total bookings growth in the mid- to high single-digits; ESM license booking growth in the low double-digits; MSM total bookings flat compared to the previous year with annualized bookings growth in the low double-digits; revenue growth in the mid- to high single-digits; non-GAAP operating margin slightly lower than the prior year; currency impact at today's rates; other income at a loss of around $30 million, which incorporates our recent $500 million debt issuance; weighted shares outstanding down approximately 5% from the prior year; and a non-GAAP tax rate of 26.5%, flat compared to 2012.

We expect full year fiscal 2013 cash flow from operations to be between $800 million and $850 million, which represents a 3% improvement over fiscal 2012 at the midpoint.

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

Question-and-Answer Session


[Operator Instructions] We'll go first to Philip Rueppel with Wells Fargo Securities.

Philip C. Rueppel - Wells Fargo Securities, LLC, Research Division

A couple of things. First, around the sales force, you mentioned the momentum you had in the fourth quarter in terms of hiring, et cetera. Can you talk about any major changes that you -- I know it's been a process over the last few quarters, but any major changes headed into 2013, the sales force being segmented differently or comp plan significantly different? And have you seen attrition pick up after the end of your fiscal year so far in Q1?

Robert E. Beauchamp

Yes. Let me answer that in reverse order, Phil. Actually, it's the opposite. April is very encouraging in terms of attrition. You always expect to see some bump because the year's over, and -- but in fact, we saw the opposite. The attrition in April was about 1/3 of what it was in April a year ago. And so there's really -- and it's not just the numbers, there's a feel. We just finished our sales kick-off events for worldwide we had 2 events, and both of them there's just a lot of very positive energy. A lot of feedback from the sales force is that things feel really good. One of the reasons for that, by the way, is we have all the -- we have the quota letters out in everywhere except for a few countries where we have to -- where there's work councils and issues like that that you have to work through to get them out. But other than a very few exceptions, we have all the quota letters out, we have the territories assigned, we have what is -- what our sales force tells me -- I'm sure that there's exceptions individuals, it's felt that the territories and the quotas are much more reasonable in their minds. We flattened the compensation system so that people can make money kind of on the first dollar instead of kind of the very, very back-end-loaded plan that we had in the last 3 or 4 years. And so in general, I think very strong feedback from our sales force that they like the changes that have happened as we begin this year. And I think the attrition numbers, knock on wood, the attrition numbers look really positive as we start the year.

Philip C. Rueppel - Wells Fargo Securities, LLC, Research Division

Great. And then maybe for Steve. As we build out our models for 2013, is there anything from a seasonal perspective that will be unique either from a bookings or revenue perspective? I know the comps get a little bit easier in the second half. But anything unusual in terms of seasonality?

Stephen B. Solcher

Yes. The one thing that I would talk about SKUs is, is that when you look at bookings and cash flow, I would encourage everybody to really look at fiscal year '11 and not fiscal year '12, where we had an unusually strong start to the fiscal year on Q1. And then for revenue and EPS, I think it will follow very similar to fiscal year '12. EPS will probably be a little bit more back-end-loaded. But in the most part, I'd say the SKUs are going to follow the fiscal year '12 actuals.


[Operator Instructions] We'll go next to Phil Winslow with Crédit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

Bob, just wondering if you could provide some more clarity on some of the changes that you're making in the sales force? On the last call, on the ESM side, you talked about going towards more segmentation. I'm just wondering sort of what's been done and where that stands right now.

Robert E. Beauchamp

Well, yes, okay. So first, this -- as was mentioned on the call, we grew total capacity by 20%. If you add Numara, the total capacity is up 25% from the same -- from where we were one year ago right now. The segmentation model that we have begins in a traditional pyramid approach where we have a strategic accounts at the top, where, let's call it a dozen or 2 accounts, I don't want to give you an exact number, but less than 2 dozen accounts are strategic accounts. And they will be managed without the MSM/ESM construct in the eyes of the customer. They will have an account executive who will deal with them as their overall relationship manager will -- those quotas, and generally custom quotas for those territories that we work -- we have, on a multi-year basis, with the sales team. Beneath that, you have our enterprise accounts, where it's a fairly traditional model in terms of our sales quotas. And then at the bottom, you have our new commercial accounts, at the bottom of our pyramid, you have our commercial accounts that the Numara acquisition is the foundation of where we've moved some of our products, including Remedyforce, we've moved some salespeople into that as well. This is a higher-volume, lower-touch, "lower cost of sales" sales channel there. Now if you want more specific details on accounts and things like, we'd probably need to take that off-line and we can try to prepare something little more specific for you.


We'll go now to Walter Pritchard with Citigroup.

Robert Chen - Citigroup Inc, Research Division

This is Robert for Walter. Question about the increase in sales capacity, 25% increase is quite a large jump. And I'm just curious if you could provide some color on the areas of investment that's going into?

Robert E. Beauchamp

Okay. The -- again, let's look at it 2 different ways. 5 full points of that is Numara, so that's the commercial. So 20% is apples to apples compared to last year. In that, it's fairly consistently distributed across the geographies. We didn't try to bias one region or one territory over another. I would tell you that we're putting a lot of emphasis on SaaS and cloud in general, but that's across the geographies. So it's a traditional geographic distribution. But where there's a lot of energy and excitement on our SaaS and cloud solutions, and we also have some specialization around our application management group as well, where we're spending some more money in there on dev ops and some of the things we're focused on there as well.

Robert Chen - Citigroup Inc, Research Division

Got it, great. And then maybe a question for Steve just around the Numara contribution in the most recent quarter. Could you provide some details there?

Stephen B. Solcher

Yes. So Numara, in the growth rates that we just gave, for total bookings, you had slightly over 2 points of help. For ESM license bookings, you had about 4 points of help. For revenue, you had about 2 points of help. At the margin level, they actually lost money and were dilutive to the tune of about $0.02. That includes the debt, so the $300 million, just assume the financing cost to pay for it is included in that dilution.

Robert E. Beauchamp

Jillian, let's have time for one more call, if you don't mind, please.


Sure. That will come from Michael Turits with Raymond James.

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

On the increase in the sales capacity, the 25%, was that total? Sometimes you give an increase in the productive sales capacity. What was that, if it was different?.

Robert E. Beauchamp

Yes. It was up about high single-digits for the...

Stephen B. Solcher

So Michael, on the average productive headcount for the year, it was up in the high. If you look at it just March over March, which is what we were giving as the 20% in total capacity, March over March for productive was in the low double.

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

And then what about targets for next year? What do you think you'll be doing with probably, let's say with productive sales increase next year?

Stephen B. Solcher

So you're looking probably at a mid-single-digit growth, with productivity probably growing in the low single-digits.

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

Okay. So mid-single-digit increase in productive headcount?

Robert E. Beauchamp


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

Okay. And then you said margins slightly down for next year. What should I think of as slightly -- the 0 to 50 bps? 50 to 100 bps?

Robert E. Beauchamp


Stephen B. Solcher

You're probably looking at 50 bps. Now all of that is strictly attributable to the mix shift where ESM's a bigger piece of the pie and the revenue contribution. We're looking for MSM to be slightly down at the margin. And when I say slightly, within 10 basis points. And then the flip side of that is ESM, we expect to be up slightly. Within the ESM, it's important to point out that we are not picking up the impact of the deferred write-down relating to the Numara maintenance. That would probably add another 80 basis points. So you're looking ESM for next year on a pro forma basis, or if you included that write-down, we'd probably up close to 100 basis points.

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

Okay. But the margin guidance overall includes the write-down, right?

Stephen B. Solcher


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

Okay. And then on the cloud bookings, I think you said you had $100 million in cloud bookings, so is that CLM? Is that what we're talking about there?

Stephen B. Solcher

It is CLM and then associated product. When CLM is sold, it's the product that is combined with that. So CLM is the core product, and then that could be some periphery product that gets drug around.

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

And if I could just get one big-picture to finish off with. It's very small guidance for next year, very encouraging. All returns [ph] sounds great and hiring sounds good. What -- still, it's very -- concerned that the ESM license bookings were down this year and that now you're guiding to them being up low double-digits for next year. That's quite a reversal. So what really gives you the visibility into that at this point?

Stephen B. Solcher

Well, first of all, some of that is just the purchase accounting affect that comes from Numara. So half of that growth is strictly -- we don't have a compare for Numara. So you're looking at license bookings growth probably in the mid- to high single-digits for ESM. Some of that is capacity, which we just talked about capacity being up, and hopefully, what you've seen in this quarter is a rebound to a plan that we're just making some slow steady progress.

Robert E. Beauchamp

And you're seeing some really strong wins in cloud, I mean, the cloud, just right before we got on the call, I got an e-mail of a verbal win, a competitive win on another transaction that we've been working on. There's just a lot of momentum around cloud, and those numbers are starting to get to be meaningful, and that business grew 70% last year just on a license basis. And so that sort of momentum, that sort of energy, we do -- we look at the pipeline and how the pipeline has developed and growing and we feel good about the year.

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

What about a -- how about -- I mean, some of the new stuff is growing well. I think some of the headwind this year might have been coming from Remedy on-premise. How are -- is that starting to stabilize? Where are we with that?

Robert E. Beauchamp

Yes. So Remedy on-premise -- if you take a step back and think about it, though, in the prior year we grew Remedy on-prem over 21%, right? On a market it that was probably growing 5%to 6%, somewhere in that range? So we had this incredible year of Remedy when we kind of had all the sales focus on it. We were then late, unfortunately, as you well know, to the SaaS market. So when it turned to SaaS, we didn't have a great answer at the same time -- and so now that, that SaaS business has really come alive for us, and we're winning head-to-head deals every day now and we're into the hundreds of customers of SaaS, the overall ITSM mix will go -- will still be -- you'll still see the overall market growing reasonably slow. But the SaaS market will grow very fast for us, and we feel really good about our competitive position against our traditional competitors, who appear to be absent still, and our smaller competitors, who had a free run for a long time. And the free rent is obviously over as we're beating them in some really, really significant deals, head-up, clean slate without any incumbent advantage from us, just beating them head-to-head. By the way, Michael, there's one point I want to make that's interesting you might find. Where -- in those situations where we're selling, for instance, where we're converting from a -- what might have been a traditional Remedy on-prem customer to a SaaS model, we are experiencing about 150% average increase in the annual spend from that customer on that conversion.

All right. Well, listen. I want to thank all of you for joining us today. We look forward to taking your individual calls, and also we'll be visiting with many of you in the weeks ahead. Thanks very much, and we'll talk to you again next quarter, if not before.


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

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