BMC Software Earnings Call Insights: ESM License Bookings and Lower Share Count

BMC Software, Inc. (NASDAQ:BMC) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

ESM License Bookings

Matt Hedberg – RBC Capital Markets: Obviously, ESM license bookings was disappointing. I guess I wanted to dig into that a little bit more. I think you indicated that there were a few large transactions that slipped. Was that more – I know at the top you mentioned was a little bit environment, little bit execution, because you sort of give us little bit more color on was that more environment, was it more execution and perhaps which geos those deals were in?

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Robert E. Beauchamp – Chairman and CEO: So, the geos were, while it was a little more Europe, I would say that it was across geographies and across verticals. It was really transactions that were transformational or optional. We did not really see slips in deals that had an expiration date, a contract renewal. These were really the deals where the customers say swapping out competitors, standardizing on our platform for their new architecture, those sort of larger deals where there is more, for lack of a better term risk to the customer more ROI, justification and when it got to procurement, we saw them slowdown for a couple for reasons. In some cases, it was a macro, whether their institution just were pulling back on discretionary, large transactions – we don’t have to do it this quarter, let’s wait. In a few cases there was – they inserted a cycle where they wanted to speak with me or with Steve or with some other executives of BMC around press coverage and our strategic revenue announcements and the press coverage surrounding that. So, we saw both of those things, kind of add an additional cycle in the close, but again it was transactions that were transformational, optional and not deals where we have for instance capacity based upgrades and contract expirations. We saw really nice compliance for the quarter on those type of deals.

Matt Hedberg – RBC Capital Markets: So not as competitive then either, is that fair to assume also?

Robert E. Beauchamp – Chairman and CEO: Probably right. I’d say it’s not that it’s not as competitive. The customer has a time – was a backstop on contracts, on the deals where you have a contract renewal, there’s pressure on us and on the customer to reach an agreement by that deadline, otherwise, the contract provisions kick in, licensing and passwords and all the things that can happen. The other one is more – they’re own internal desire to lower their cost, improve their operations and more discretionary sort of spending that were the ones that we saw slowdown. Yeah, I guess, you could say more competitive. We’re trying to replace competition in quite a few of them.

Matt Hedberg – RBC Capital Markets: Then in terms of the full year guide, it’s obviously a different tone than last quarter, which I think you’re expecting sequential and year-on-year growth in both the 3Q and 4Q period. So, I think at the midpoint of your full year ESM guide. It imply down kind of low-double digits for 4Q. Given the commentary around some deals that had already closed or are still there, how conservative is that estimate versus prior expectations?

Stephen B. Solcher – SVP and CFO: One think I’d just start with is that the percentage of transactions over the quarter, excuse me, if I look at the dollar volume that we do in a quarter that are in transactions $1 million or above we track that pretty closely and it typically runs in the high 40s approaching 50% of our bookings in any particular order or these large transactions. This quarter is the first time that I can remember and we went back I think four years and just looked at it, we’ve not seen it drop below 40% and it did this quarter. So not only was the transaction, but we actually saw statistically a smaller percentage of our bookings on large transaction. We’re assuming in the guidance that actually worsens and that we go to really an unprecedented or certainly many, many years level of volume of large transactions just to be I hope on the safe side, right. We’re also assuming that the close rates that we saw in Q3 actually worsened in Q4 as we give this guidance and so we’ve got significantly more upside as it relates to the forecast that we had in is Q3. We’ve got more buffers built into it, but given what happened Q3, you know, I don’t know if I am being conservative, but we think are being conservative by applying these numbers that we would have not applied before.

Matt Hedberg – RBC Capital Markets: And then if I could just squeeze in one last one you didn’t talk about fiscal ’14 guidance at this point but really given at least from a guidance perspective two straight down years on ESM side should we get is it safe to assume, that we should assume some growth in ’14 on the ESM side or is that maybe?

Robert E. Beauchamp – Chairman and CEO: It’s safe to assume – we should assume growth. We should assume a company that is more focused on operating income, cash flow and margins.

Lower Share Count

Aaron Schwartz – Jefferies: Just a follow-up on the comments you made about some more upside potential relative to your guide. Can you just talk about how that then flows through on the expense side, does that put through more people in an incentive phase? And what I’m getting to, it does look like the earnings would be lower on a sequential basis to what you just reported despite the ASR, the big buyback in the quarter, I’m just trying to reconcile as to why the earnings would be down on a much lower share count?

Stephen B. Solcher – SVP and CFO: Is that a Q4 statement Aaron?

Aaron Schwartz – Jefferies: Yes.

Stephen B. Solcher – SVP and CFO: I think it really is, we’re being conservative on the revenue side and then you got to take the sequential seasonal pattern where expenses actually grow in Q4. It is all of the variable compensation heavily backend loaded and you’ll see that in the half as well as Q4. You’ve got all the resets from calendar payroll taxes, 401 K and the like. So it is not atypical for us to see a seasonal swing in Q4 for just our normal non-GAAP expense structure.

Robert E. Beauchamp – Chairman and CEO: Then our sales comp plans are backend loaded.

Aaron Schwartz – Jefferies: So I guess what I was asking, because your expenses were pretty in line with our model despite the lower bookings number. I would have assumed variable comp would have been lower, but it didn’t seem like it was. I just don’t know sort of the recut of the guidance, your puts maybe more sales focused in sort of an accelerated phase and that’s what sort of making the backend loaded expense structure?

Stephen B. Solcher – SVP and CFO: Not really. I mean, we’re being conservative in the way that we’re modeling out our revenue going forward so the deferral rate is slightly higher in Q4 than in Q3. Even though you are going to see a sequential increase in ESM license bookings our expectation right now on the guidance is that we also are factoring in a higher deferral rate. So I believe what you’re seeing is, is the upside that Bob talks about comes and we’re going to do better at the op margin level.

Aaron Schwartz – Jefferies: Then, you’ve mentioned and I’m sure you don’t have all the answers. You had given the review, it sounds like it’s just starting, but you’ve talked about sort of a few times here the operational discipline into next year in a much more – a focus on the earnings growth and the operating margin growth. Is there any sort of – can you elaborate on that a little more, is this sort of a shift in focus if you look at the growth reinvestment balance a little bit, or are we getting ahead of ourselves and making that comment?

Robert E. Beauchamp – Chairman and CEO: I’d say that we’re not going to – as we said in the introductory comments, we think our SaaS business, our cloud business, our mobility MyIT consumerization business, our Control-M business, our growth engines that we talked about last quarter, continue to do well and we need to feed them even more. I think that we – there’s other parts of our business that are not delivering the ROI they need to deliver and we’re going to find ways to move funds to these growth engines at even faster pace which is really accelerating some of the things we’ve talked about last quarter. There is no wholesale change in our strategy. It’s just moving faster and it’s also being a little more pragmatic about the need to deliver operating income cash flow and margin given these top line numbers. So, this management team, if you go back in time has been very effective at delivering on cash flow op income and margin expansion when it’s focused on it, and we’re very focused on that next year so that we can deliver the results we need and the growth we need next year.

Aaron Schwartz – Jefferies: Okay and I know you are not sort of quantifying anything, but the way you talked about the margins here, should we assume that cash flow sort of follows that same directional flow?

Stephen B. Solcher – SVP and CFO: Yes.