Q2 2012 Earnings Call Transcript
Transcript Call Date 06/28/2012

Operator: Good afternoon, ladies and gentlemen. I am Jumaria. Welcome to TIBCO's Second Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. You can also listen to this call via the Internet at www.tibco.com.

Today's call is being recorded and will be available for playback from TIBCO Software's website at www.tibco.com. In addition, replay will be available through InterCall for one month following today's call by dialing 800-585-8367 or 404-537-3406 internationally. The confirmation code is 88581564.

The following conference call includes forward-looking statements, which represent TIBCO Software's outlook and guidance only as of today and which are subject to risks and uncertainties. These forward-looking statements include, but are not limited to, forecasts of revenues, operating margins, operating expenses, outstanding shares, and earnings per share for future periods. Our actual results could differ materially from those projected in such forward-looking statements. Additional information regarding the factors that could cause actual results to differ materially are discussed in the Risk Factors section of TIBCO's most recent reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission. TIBCO assumes no obligation to update the forward-looking statements included in this call whether as a result of new developments or otherwise.

This conference call also includes certain financial information that has not been prepared in accordance with Generally Accepted Accounting Principles, as we believe that such information is useful for understanding our financial condition and results of operations. For 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 presenters on the call are Vivek Ranadive, TIBCO's Chairman and CEO; Murray Rode, Chief Operating Officer; and Sydney Carey, Chief Financial Officer.

I'd now like to turn the call over to Vivek.

Vivek Ranadive - Chairman and CEO: Thanks. Hello everyone for joining us today. I'll begin with a brief discussion of our Q2 performance and provide some remarks on the broader environment we are seeing before turning it over to Murray and Sydney to discuss details.

We delivered another quarter of strong growth in Q2 with total revenue increasing 20% and license revenue increasing 17% respectively on a constant currency basis. Sydney will describe the currency effects in further detail later in the call.

As reported, total revenue came in at $247 million. License revenue was $93 million. Non-GAAP operating margins were 25% and our non-GAAP EPS was $0.26. This now marks four straight years, 16 consecutive quarters, where we have beaten consensus EPS estimates. This will also be the tenth consecutive quarter of growing EPS by more than 20% over the prior year.

It was a busy quarter for TIBCO. We met or exceed all of our guidance metrics. We acquired a great company and exciting technology in LogLogic. We signed some terrific new logos in partners. We showed up our balance sheet and domestic cash. We held a number of regional marketing events that saw truly impressive attendance and demand.

A lot of people are wondering, what are we seeing in the broader environment and how is it that we are continuing to grow a 20%; here is my perspective. Firstly, any volatility in this time should be sharply contrasted with 2008 and 2009. We do not see what was then a shutdown in spending. We do not see big deals going up. In fact, companies are willing to fund large technology buys when the value is clearly demonstrable. Ironically, I might argue that it's actually easier to justify a big deal than a small deal in the current environment, because the big one can actually move the needle on the Company's performance.

Secondly, marketing is really emerging as a larger and larger influence on corporate budgets and CMOs are making more important technology decisions. I believe this is because companies are looking to marketing to figure out how to expand, how to engage and how to monetize the social network that is inherent in every company, and this involves more than just setting up a Facebook page.

If a company really wants to see the exponential value of its social network, it needs the platform, the application and the tools that enable it to understand and exploit all the information flows, that is the big data that makes up that social network. This plays right into TIBCO's experience.

And finally, the demand for our event-driven infrastructure applications has never been greater. While 20th century players are tied to the database and most of the smaller players are one product companies focused only on one segment, TIBCO offers a powerful integrated assembly of pearls, everything needed for delivering event-driven applications and the two-second advantage.

Consider just one of those pearls, TIBCO Loyalty Lab, our cloud-based loyalty platform. Today, Loyalty Lab has 260 million loyalty members under management. This is up 120% in the past 12 months and up $40 million in Q2 alone. In the past year, we added eight different retail categories, including sports retail, beauty, hardware, pet supplies, travel, restaurant retail and this quarter kiosks and coffee. Now by adding other pearls such as Spotfire, BusinessEvents and Master Data Management to TIBCO Loyalty Lab, we're working to deliver next generation real-time intelligence platforms for some of the fastest growing retailers in the country.

Our same infrastructure platform is event enabling, global supply chains, delivering significant improvements in risk management and fraud and doing so across a wide range of industries. We have the platform that customers need to tackle 21st, century challenges and opportunities.

Still, I am not satisfied. My guys don't like me saying this, but we could be doing better. Given that our value position, our competitive position and our brand have never been stronger. We should be doing even better. I believe our execution in certain markets can get better. We can improve our ability to articulate the extreme value we bring to the table and we will. This is a market of haves and have nots. For some companies it is the best of times, for others, it is the worst of times. For us and for our clients, I believe it is the best of times.

Now, I'll turn it over to Murray.

Murray Rode - COO: Thanks, Vivek. I'll cover some key operating metrics for the quarter and then turn it over to Sydney. Please bear in mind that when I speak of regional or product growth rates, that I'm presenting them in actually dollar terms and not adjusted for constant currency.

I'll start with our license transaction numbers. During Q2 we had a good range of business with 137 deals over $100,000 in license revenue, up from 119 a year ago. We also had 20 deals over $1 million in license revenue which is one less than a year ago. Our average deal size this quarter was approximately $620,000 versus about $630,000 last Q2, and our top 10 customers comprised approximately 19% of our total revenue versus 21% a year ago.

Looking at the geographic mix of total revenue it was as follows; Americas at 53%; Europe, Middle East, Africa at 34%; and Asia Pacific and Japan at 13%. Asia Pacific/Japan was the standout performer this quarter growing 40% over the same period a year ago from contributions across the region. Manu of our customers there are facing increasingly competitive markets, so they are looking for a platform like ours that helps them break down functional silos, create new service models, and streamline processes end to end. The notion of becoming event-driven to be able to cross-sell more and better service customers is very relevant to the competitive dynamics in the regions.

For the rest of the world the Americas grew 17% and Europe grew 4%. On a year-to-date basis Americas is up 13%, Europe 22%, and Asia about 27%. In terms of our sales capacity, we grew quota-carrying headcount to 276, on target with our goals for mid-year. We've also increased our services organization to over 1,000 people, an increase of 36% year-over-year.

I would also point to a couple of organizational changes we made recent. First we have arranged much of our regional technical organizations for pre and post sales into more of a global organization to better support multiproduct or platform style implementations. And second, we are modifying our approach to the Americas business to better capture the opportunity and better support our platform sales strategy. So, we have changed the leadership in the role of SVP, Americas for core infrastructure sales. Longer term, we will look to replace this role, but for now the regional sales VPs in the Americas will report directly to Murat Sonmez, our Executive Vice President of Global Sales and Services.

Shifting to vertical markets, we had eight industries deliver 5% more on total revenue as follows. Financial services comprised 22% of total revenue, communications 11%, manufacturing 9%, energy 8%, life sciences 8%, healthcare 7%, retail 7% and government 6%. Healthcare was way up this quarter increasing to almost four times last year's attainment. Manufacturing and life sciences grew 92% and 57%, respectively, and other particularly strong growth verticals included CPG and retail, which grew 50% and 21%, respectively.

From a product segment perspective Q2 was all about business process management, as this was the strongest growth quarter for BPM and collaborative technologies that we've seen in many quarters. The breakdown of license revenue among our major product families was SOA 55%, business optimization 31%, and BPM 14%.

BPM grew 80% year-over-year in the quarter, driven by increasing AMX BPM sales. Year-to-date, the BPM category is up by 48%, while AMX BPM specifically is up by 80% over the first half of last year. SOA was up just over 14% with key product drivers in core infrastructure, connectivity and our cloud middleware, Silver Fabric, which had another particularly strong quarter up several fold from last Q2.

Business optimization was up only marginally, but remained a key factor in most of our larger deals. Coming of a string of growth quarters and an especially strong Q1, Spotfire showed less growth this Q2, but continues to show strong pipeline growth and is up over 43% year-to-date.

BusinessEvents was down on the quarter, but this belies its central role in enabling many of our infrastructure applications, and it remains a key differentiator for us. In fact, BusinessEvents was in 13 of our 20 licensed deals of 1 million or more. In general, we are seeing a trend toward more platform-oriented deals which include BE or BusinessEvents as the event processing engine within a broader deployment as opposed to a discreet product sale.

Also this quarter, we added LogLogic which brings TIBCO a powerful new ability to ingest and interpret log files for use in a range of risk, security, operational intelligence in broad applications. It contributed only modestly on the quarter and we are still in the process of normalizing contracts and processes into our business, so we don't expect this business to fully hit its stride for the start of next year.

The last comment I'd make on products is we had some notable partner-related sales in the quarter, with 37% of license revenue influenced by partners. This was higher than our normal rate, but still reflects the overall positive trend we are seeing with partners. So, at the halfway point in our fiscal year, total revenues are up over 21% on a constant currency basis over the first half of last year. At the same time we've continued to expand our operating margin and grown our non-GAAP EPS 26% year-to-date. We also continue to see vertical market diversification, increasing traction for our platform story. For the second half of the year, we will continue to invest for growth while optimizing operations for best leveraged and sales effectiveness.

With that, I'll turn it over Sydney Carey.

Sydney Carey - EVP and CFO: Thank you, Murray. I will provide additional details on our financial performance in Q2 and then I will provide comments on our financial outlook for Q3. I'll review our financials on both a GAAP and non-GAAP basis. A full reconciliation was included with our press release, along with an explanation of our non-GAAP measures.

As Vivek mentioned, U.S. dollar strengthened compared to foreign currency and impacted our results materially this quarter. So, I'll be sure to highlight the impact of these movements on revenue and earnings. The key performance data on our second quarter results are as follows. Total revenue was $247.4 million, up 14% year-over-year on an actual basis, but up 23% on a constant currency basis. License revenue was $92.6 million, up 13% year-over-year on an actual basis, but up 17% on a constant currency basis. Services revenue was $154.8 million, up 15% year-over-year on an actual basis, but up 21% on a constant currency basis.

Non-GAAP gross margin for Q2 was 74%, in line with last year. Non-GAAP operating income was $61.8 million, up $11 million or 22% from the same period a year ago. This resulted in an operating margin of 25%. On a constant currency basis, operating income grew by over 35% versus the same period a year ago. Non-GAAP EPS was $0.26 versus $0.21 a year ago. We estimate the currency impact to earnings to be a negative $0.03. Q2 cash flow from operations totaled $75.8 million and on a year-to-date basis totaled $116.9 million, which is an increase of 40% from the same period a year ago.

Moving down to the balance sheet, deferred revenue including both long and short-term component totaled $254 million, up $27 million, which is an increase of 12% or 19% on a constant currency basis from Q2 of last year. DSOs for Q2 came in at 64 days, down from 71 days a year ago. Also during the quarter and largely in conjunction with our convertible debt offering, we spent over $121 million in share repurchases buying back approximately 3.6 million shares.

As we look forward to Q3 we continue to see a 5% to 6% currency headwind on revenue with a larger impact to earning. Our guidance for Q3 is as follows. We expect total revenue to range from $255 million to $265 million. On a constant currency basis this represents growth of 17% to 22%. We expect license revenue to range from $98 million to $106 million. On a constant currency basis this represents growth of 13% to 22%. The non-GAAP operating margin is expected to be 25% to 26%. The non-GAAP EPS for the quarter should range between $0.25 and $0.27. We are estimating the impact to currency and earnings to be a negative $0.03. Note that this guidance assumes a 27% tax rate. However, this can vary depending on the mix of foreign versus domestic profit. GAAP EPS should range from $0.12 to $0.14 with an assumed tax rate of 23%.

With that we'll be happy to take your questions.

Transcript Call Date 06/28/2012

Operator: Brent Thill, UBS.

Brent Thill - UBS: Vivek, you mentioned the U.S. growth rate, can you just give us a sense of – is this more execution-related or competitive-related and how long do you think it will take to get it back to where you would you like to see it?

Vivek Ranadive - Chairman and CEO: Well, it's really execution-related, Brent. We haven't been executing well in the United States. So we think we'll get back to where we'd like to be by – we hope to do it very quickly. So, we hope that this quarter and next we'll again be firing on all the cylinders that we'd like to be.

Operator: John Difucci, JPMorgan.

John Difucci - JPMorgan: I guess, Vivek, you said you're not seeing the shutdown in spending, you're not seeing yields dry up like it did in 2008, 2009, but even during that period, and we all know though that there is sort of some softness out there when you hear it from a lot of people, things about Europe, things about financial services, and you have a lot of exposure to them. As you did in 2008, 2009, but during that period, I think you surprised a lot of people by putting up numbers, even inflations might have been a little late in certain quarters. You actually put up bottom lines that were really strong, remain solid throughout. I guess, if things do change and get materially more difficult as far as the environment, taking your execution out of it for a second. How committed are you to the operations of the Company and just making sure you continue to execute on a financial perspective? And maybe that's a question for Sydney also.

Vivek Ranadive - Chairman and CEO: I think, John, that's a good question. So we've had 16 consecutive quarters where we've beaten our consensus, and we've been hitting the ball right down the middle of the fairway every single time in good times and bad. We made a commitment to you four years ago that we are going to keep growing our earnings per share, and we have said that we'll grow our EPS 15% to 20%. And now for 10 consecutive quarters we've grown it at more than 20%. So you're going to see us being very, very disciplined in terms of continuing to grow our EPS at 15% to 20%. But right now what we are seeing is opportunities, John. So, we need to make sure that we are keeping addressing in that opportunity. And what we are seeing right now is, it seems kind of intuitive, but actually companies are willing to spend big money if you can demonstrate value to them. So we just need to do a better job. I think we are leaving money on the table right now and I want to go pick it up. So, if there is a dramatic change in the environment, we are still going to give you the 15% to 20% EPS growth that we promised as we did in the past years as you pointed out.

Operator: Derrick Wood, Susquehanna International.

Derrick Wood - Susquehanna International: There seems to be a lot of questions around what the run rate was on LogLogic and what the contribution should be going forward and maybe potential impacts for maintenance write-downs. I mean, could you give us some color as to what the contribution is within your guidance for Q3?

Vivek Ranadive - Chairman and CEO: We will be happy if you have like a 1% or 2% impact which could probably be more than (indiscernible) by the currency impact, but we think that we'll actually start really hitting our strides next year as we fully integrate LogLogic with Spotfire and BusinessEvents. We think we're sitting on a potential gold mine. So, we'll take our usual approach. Well, we will integrate it. We'll get a few key wins and then come next year we'll start blowing it out.

Operator: Brad Zelnick, Macquarie Securities.

Brad Zelnick - Macquarie Securities: Well I was hoping you could maybe just expand on the go-to-market changes in North America. This comes as a bit of surprise after multiple quarters of strong execution. Just wanted get a better understanding of what precipitated the change especially here it sounds like you're swapping out an executive who has a very successful track record at TIBCO? If you could expand on what the impact of the business might be from the change?

Vivek Ranadive - Chairman and CEO: So, we think that the business will be very positively impacted. I was not happy with the way we were executing for the last three or four quarters. We felt that execution in other geographies like Europe and Asia was very strong. I felt we were leaving too much money on the table. We were not really capitalizing on the opportunity that we had and I like to say at TIBCO that if you just do what is expected of you, you get a C and you have to do more than that in order to get A at TIBCO. I just saw that we could be doing better and so we decided to make a change.

Operator: Kash Rangan, Merrill Lynch.

Kash Rangan - Bank of America-Merrill Lynch: It looks like your sales headcount hiring is still tracking very nicely and (indiscernible). So if we are able to put this execution thing in the U.S. behind us, do you think we should be able to reaccelerate licenses on a constant currency basis? And I'm curious, Vivek, if you can give us a little bit more color or maybe Murray how would you expect the interim changes with the North American sales executives reporting directly to Murat. How long do you think we should expect the transition to be and how close could that be?

Vivek Ranadive - Chairman and CEO: Yeah, so we had I think 17% constant currency growth. We think that with the changes that we are making whatever Murat focuses on does very, very well and so I've asked him to personally focus on the Americas. I personally have been in meetings all day with my America staff and I feel very, very confident that we're going to be getting back to where I want to be as early as this quarter. So that's number one. Number two, Kash, we're seeing – we just had a conference – we're having these conference where we're sharing what we're doing with customers, regional conference. We had one in London yesterday. We were expecting 200 people, then we were told that they were going to be like 500 and then after that yet another 100 who showed up on top of that who hadn't even registered. So literally we had tripled the attendance that we thought. Then this morning I get a text from Paris that we thought we'd have 50 to 100 people and we had 350 people show up in Paris. So what we're seeing is that there is very, very strong demand for what we do, and we need to execute. We haven't been executing to my satisfaction in the Americas, and this quarter we will be very, very, very focused on doing just that. Murray, do you want to add anything.

Murray Rode - COO: Yeah. The only thing I would add is just that this change doesn't affect all of the America sales organizations, because we still have groups like our Spotfire sales group or the OEM partner group, which reports through a different reporting line. So, those are groups that have been doing well and we expect will continue to do well.

Kash Rangan - Bank of America-Merrill Lynch: Yeah. So, the groups that reported outside of the infrastructure business, those groups continued to show that kind of growth that we had hoped to say. So…

Murray Rode - COO: So, that moderated the effect I think you were asking about.

Kash Rangan - Bank of America-Merrill Lynch: Yeah.

Operator: Jason Maynard, Wells Fargo.

Jason Maynard - Wells Fargo: One question. I wanted to follow-up on Vivek's commentary around, it sounded to me like you were sort of insinuating that you're going to protect earnings, if things got a little trickier dicier, however you want to describe it. And I guess the thing I'm having trouble squaring up is that if there is so much opportunity and you're (Triple), you're overbooked three times in Paris and London and all these great data points that you're sharing with us. Why would you worry about protecting EPS by a couple cents in the short-term when it's clear you're probably under-distributed on a global basis relative to your competitors and your perhaps, if you will, not as present in as many deals as you probably need to be to take advantage of this big opportunity that seems to be turning your way. So, help me square this up?

Vivek Ranadive - Chairman and CEO: Yeah. So Jason, this is a debate that we've had before, and we as a company, we stand for growth with leverage that's been the promise that we've made. And so, we'll grow and we'll always create leverage. We said we would back off a little bit on that leverage, so that our profitability won't be quite as high as we had said it would, but it will still be growing. So from our perspective, we are continuing to make investments. We are continuing to hire in sales, we are continuing to invest in R&D. We are continuing to invest in our customer facing organizations, so we are not really slowing that down. But we made a commitment to you guys that we'd keep growing at 15% to 20% a year, and we'll keep doing that. Sydney, you wanted to add to that?

Sydney Carey - EVP and CFO: Yeah. I was just going to say we set out at the beginning of the year to be at 275 quarter carrying reps mid-year, which is up 25% over last year and we hit that target. We look to continue to add during the second half and the year somewhere between 300 and 310 quarter carry reps, again up 25% over where ended last year. So, we are making the investments, we are making the investments in field enablement and we are very focused on bringing those reps on board and getting them productive.

Operator: Karl Keirstead, BMO Capital Markets.

Karl Keirstead - BMO Capital Markets: My question has to do with the August quarter license guidance. It has a broader range than we are used to seeing, and I am curious if you could sort of rank quarter what the variables out there that you are considering and setting a somewhat wider range. Is it uncertainty around how quickly you can execute better in the U.S., is it a reflection of the uncertainty in Europe, maybe a little color there might help us. Thanks.

Vivek Ranadive - Chairman and CEO: If you look at our guidance range, it's actually more aggressive than it was a year ago the same time. So, on a sequential basis or even on a year-over-year basis, so it's actually consistent with the type of guidance we've given in the past. There are more uncertainties this year in terms of things like currency headwinds. So, we are just being – we just want to for 16 consecutive quarters we've under promised and over delivered and we'd rather stay in that mode. Sydney, do you want to add to that?

Sydney Carey - EVP and CFO: Just again, I think that currency is having an effect on it as well as just going into our summer quarter. We thought it was more appropriate to have a little bit broader range on license and total revenues at the period.

Operator: Aaron Schwartz, Jefferies & Company.

Aaron Schwartz - Jefferies & Company: I just had a follow-up on the commentary you made about the structure of the sales organization in North America. You sort of said that Spotfire was somewhat segmented from where you thought execution wasn't great, but the Spotfire numbed seemed liked they were probably still little below what you were expecting, so can you just walkthrough, why that was or why those deals sort of gotten held up and sort of reconcile your views on execution for Spotfire versus rest of North America?

Vivek Ranadive - Chairman and CEO: I think Murray, you can talk more to this, but we actually had a very strong quarter, the previous quarter and things that we thought would closed in Q2, closed in Q1 and so we had a very, very strong showing. So, I think there was some of that impact. So, that really… You want to add to that Murray?

Murray Rode - COO: It was just part of the reason we called out the year-to-date number for Spotfire being up 43%. Spotfire also had a very strong fiscal 2011. So, as Vivek says, we think there was a little bit of effect in Q2 just because we had such huge growth in Q1. I mean we're up I think about 100 growth – over 100% growth in Q1. So, little bit of a carryover effect, but the pipeline there continues to look great and we just really like the prospects on that business.

Operator: Jesse Hulsing, Pacific Crest Securities.

Jesse Hulsing - Pacific Crest Securities: Can you talk a little bit more about growth in your services headcount? Is there a concerted effort to take more consulting expertise in-house and lead with your services capabilities, and what impact is that having on your partner program?

Vivek Ranadive - Chairman and CEO: Our partner program is the strongest it's ever been, but there is just a lot of money on the table right now. So, it's not one or the other. We actually, by doing what do, we can actually expand the pie for our partners. I think the shift is more that, what we're seeing is customers are really liking our pearl necklaces approach. So, we're selling these value propositions, so customer up-sell and cross-sell. So, our services organization is now more involved in being kind of that glue that knit together the different pearls that we have or selling operational efficiency or selling risk management. So what we do is, we take a number of different pearls and we knit them together and we sell them. The solution is, we target the Chief Marketing Officer, and I think that's where our services organization steps in. Murray, do you want to comment on the headcount and so on?

Murray Rode - COO: Only to reinforce the point that we think it's – as Vivek said, it's expanding the pie. It's a reflection of demand in general, and we think it also reflects the increase in demand for our partners. So, it makes us better capable to support them too.

Operator: Mark Murphy, Piper Jaffray.

Matthew Coss - Piper Jaffray: This is Matt Coss calling in for Mark Murphy. Just a question on Europe, are you seeing any evidence or just anything that makes you worry over there? I mean, are sales cycles getting longer, are deals getting harder to approve, just anything that gives you either more or less worry about Europe right now?

Vivek Ranadive - Chairman and CEO: Well, we don't see a change from a quarter ago. We think that as long as we show the value, a couple of the deals that I was involved in, they were very, very focused on getting what we had to offer, done, because they saw a huge value, so we actually closed some large deals in Europe. I think, if you have the goods and if you are able to show the value, you can move the needle. I think you have prioritized high then it's a good thing. So, I like to say it's the best of times and the worst of times, and we just have to keep doing what we have to do to make it the best of times for us and for our clients.

Operator: At this time, I will turn it back over to Vivek for closing remarks.

Vivek Ranadive - Chairman and CEO: Thank you all for joining us today. We hope to see many of you at our User Conference, TUCON. It's in Las Vegas, September 24th to 27th. And with that, we'll now conclude this call. Thank you.

Operator: Thank you for joining us. We will now conclude TIBCO's Q2 2012 earnings call.