1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission file number 0-17136
BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2126120
(State or other jurisdiction of (IRS Employer identification No.)
incorporation or organization)
BMC Software, Inc.
2101 CityWest Boulevard
Houston, Texas 77042
(Address of principal executive officer) (Zip Code)
Registrant's telephone number including area code: (713)918-8800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No______
As of February 5, 1997, there were outstanding 101,237,083 shares of Common
Stock, par value $.01, of the registrant.
2
BMC SOFTWARE, INC. AND SUBSIDIARIES
Quarter Ended December 31, 1996
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
----------------------
Item 1. Financial Statments 3
Condensed Consolidated Balance Sheets - December 31, l996
(Unaudited) and March 31, 1996 3
Condensed Consolidated Statements of Earnings
Three months ended and nine months ended
December 31, l996 and 1995 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Nine months ended December 31, 1996 and 1995
(Unaudited) 6
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 8
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, March 31,
ASSETS 1996 1996
------------ ---------
(Unaudited)
Current assets:
Cash and cash equivalents $67,254 $62,128
Securities available for sale 6,842 8,464
Securities held to maturity 59,341 59,566
Trade accounts receivable, net 78,719 79,299
Interest and other receivables 11,629 7,723
Prepaid expenses and other 6,935 5,922
Deferred income and other taxes 13,093 4,870
-------- --------
Total current assets 243,813 227,972
-------- --------
Property and equipment, net 115,407 107,912
Software development costs, net 35,084 25,840
Purchased software, net 18,420 13,400
Securities available for sale 86,288 39,281
Securities held to maturity 272,590 182,593
Finance receivables, long-term 4,838 4,146
Deferred charges and other assets 12,127 7,074
-------- --------
$788,567 $608,218
======== ========
See accompanying notes to condensed consolidated financial statements.
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4
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(continued)
December 31, March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1996
------------ ---------
(Unaudited)
Current liabilities:
Trade accounts payable $13,393 $27,747
Accrued liabilities 34,855 33,214
Taxes payable 17,511 16,595
Current portion of deferred revenue 126,321 106,641
-------- ---------
Total current liabilities 192,080 184,197
-------- ---------
Deferred revenue and other 87,772 40,313
-------- ---------
Total liabilities 279,852 224,510
-------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value,
1,000,000 shares authorized, none
issued and outstanding -- --
Common stock, $.01 par value, 300,000,000
shares authorized, 105,040,000 shares issued 1,050 1,050
Additional paid-in capital 70,624 67,888
Retained earnings 511,709 401,250
Foreign currency translation adjustment (252) 82
Unrealized gain (loss) on securities available for sale 153 82
-------- ---------
583,284 470,352
Less treasury stock (4,053,000 and 5,094,000
shares, respectively) at cost 72,325 84,480
Less unearned portion of restricted
stock compensation 2,244 2,164
-------- ---------
Total stockholders' equity 508,715 383,708
-------- ---------
$788,567 $ 608,218
======== =========
See accompanying notes to condensed consolidated financial statements.
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5
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -----------------
1996 1995 1996 1995
---- ---- --- ----
Revenues:
Licenses $103,989 $78,524 $268,644 $182,590
Maintenance 46,071 40,476 133,966 117,960
-------- ------- -------- --------
Total revenues 150,060 119,000 402,610 300,550
-------- ------- -------- --------
Operating expenses:
Selling and marketing 40,094 32,281 113,355 79,100
Research and development 20,056 15,729 57,748 43,036
Cost of maintenance services
and product licenses 13,657 11,367 40,793 32,094
General and administrative 12,343 11,176 34,021 27,003
Acquired research and
development costs -- 23,589 11,259 23,589
-------- ------- -------- --------
Total operating expenses 86,150 94,142 257,176 204,822
-------- ------- -------- --------
Operating income 63,910 24,858 145,434 95,728
Other income 5,300 3,956 14,233 11,541
-------- ------- -------- --------
Earnings before taxes 69,210 28,814 159,667 107,269
Income taxes 21,109 15,749 49,208 40,455
-------- ------- -------- --------
Net earnings $48,101 $13,065 $110,459 $66,814
======== ======= ======== ========
Earnings per share $.45 $.13 $1.03 $.64
======== ======= ======== ========
Shares used in computing
earnings per share 107,748 103,930 106,921 104,500
======== ======= ======== ========
See accompanying notes to condensed consolidated financial statements.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
December 31,
------------
1996 1995
---- ----
Cash flows from operating activities:
Net earnings $110,459 $66,814
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Acquired research and development costs 11,259 23,589
Depreciation and amortization 23,904 19,692
Net change in receivables,
payables, deferred revenue and other items 57,925 (26,401)
--------- --------
Total adjustments 93,088 16,880
--------- --------
Net cash provided by operating activities 203,547 83,694
--------- --------
Cash flows from investing activities:
Technology acquisitions, net of cash acquired (14,714) (15,051)
Purchased software and related assets (6,825) (2,232)
Capital expenditures (20,733) (14,135)
Capitalization of software development (15,518) (12,733)
Purchases of securities held to maturity (184,704) (52,091)
Proceeds from securities held to maturity 30,288 42,461
(Increase) decrease in long-term finance receivables (692) 2,657
--------- --------
Net cash used in investing activities (212,898) (51,124)
--------- --------
Cash flows from financing activities:
Earned portion of restricted
stock compensation 1,204 1,012
Income tax reduction relating
to stock options 2,458 2,713
Stock options exercised and other 12,029 3,441
Treasury stock acquired (880) (53,270)
--------- --------
Net cash provided by (used in)
financing activities 14,811 (46,104)
--------- --------
Effect of exchange rate changes on cash (334) 251
--------- --------
Net change in cash and cash equivalents 5,126 (13,283)
Cash and cash equivalents at beginning of period 62,128 39,494
--------- --------
Cash and cash equivalents at end of period $67,254 $26,211
========= ========
Supplemental disclosure of cash
flow information:
Cash paid for Income taxes $53,532 $19,934
Treasury stock issued for technology acquired -- 20,611
See accompanying notes to condensed consolidated financial statements.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of BMC Software, Inc. and its wholly owned subsidiaries (collectively,
the "Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals)
which, in the opinion of management, are necessary for a fair presentation of
the results for the interim periods presented. These financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
These financial statements should be read in conjunction with the
Company's annual audited financial statements for the year ended March 31,
1996, as filed with the Securities and Exchange Commission on Form 10-K.
Note 2 - Earnings Per Share
Earnings per share is based on the weighted average number of common
shares and common stock equivalents outstanding for the period. For purposes
of this calculation, outstanding stock options and unearned restricted stock
shares are considered common stock equivalents using the treasury stock method.
Fully diluted earnings per share is the same as, or not materially different
from, primary earnings per share and, accordingly, is not presented.
Note 3 - Technology Acquisitions
During the quarter ended June 30, 1996, the Company completed the
acquisitions of assets of certain technology companies for an aggregate
purchase price of approximately $13 million, including direct acquisition
costs. The Company accounted for these transactions using the purchase method
of accounting and recorded an $11,259,000 charge ($7,318,000 net of income tax
benefits), for acquired research and development costs.
Note 4 - Stock Split
On October 18, 1996, the Company declared a two-for-one stock split of its
common stock. The stock split was effected in the form of a stock dividend.
Stockholders of record at the close of business on November 4, 1996 received
one share of common stock for each share of common stock held. The payment
date for the distribution of shares was November 18, 1996. All stock related
data in these condensed consolidated financial statements reflects the effect
of this stock split for all periods presented.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This discussion comprises historical information for the periods covered,
followed by certain forward looking information and information about certain
risks and uncertainties that could affect the Company's future operating
results. This discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto and with the
audited financial statements and notes thereto, and the Management's Discussion
and Analysis of Results of Operation and Financial Condition, contained in the
Company's Form 10-K for fiscal 1996.
A. HISTORICAL INFORMATION
RESULTS OF OPERATION
The following table sets forth, for the periods indicated, the percentages
that selected items in the Condensed Consolidated Statements of Earnings bear
to total revenues. The year to year comparisons of financial results are not
necessarily indicative of future results.
Percentage of Total Revenues
--------------------------------------------
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
License 69.3% 66.0% 66.7% 60.8%
Maintenance 30.7 34.0 33.3 39.2
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Selling and marketing 26.7 27.1 28.2 26.3
Research and development 13.4 13.2 14.3 14.3
Cost of maintenance services
and product licenses 9.1 9.6 10.1 10.7
General and administrative 8.2 9.4 8.5 9.0
Acquired research and development costs -- 19.8 2.8 7.8
----- ----- ----- -----
Operating income 42.6 20.9 36.1 31.9
Other income 3.5 3.3 3.6 3.8
----- ----- ----- -----
Earnings before taxes 46.1 24.2 39.7 35.7
Income taxes 14.0 13.2 12.3 13.5
----- ----- ----- -----
Net earnings 32.1% 11.0% 27.4% 22.2%
===== ===== ===== =====
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
REVENUES
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
(in thousands) (in thousands)
1996 1995 Change 1996 1995 Change
--------- --------- ------ --------- --------- ------
North American license revenues $56,829 $41,954 35.5% $168,045 $107,726 56.0%
International license revenues 47,160 36,570 29.0% 100,599 74,864 34.4%
--------- --------- --------- ---------
Total license revenues 103,989 78,524 32.4% 268,644 182,590 47.1%
Maintenance revenues 46,071 40,476 13.8% 133,966 117,960 13.6%
--------- --------- --------- ---------
Total revenues $150,060 $119,000 26.1% $402,610 $300,550 34.0%
========= ========= ========= =========
LICENSE REVENUES
The Company's license revenues include fees generated from (a) the initial
licensing of a copy of a software product and any additional licenses of such
product, (b) central processing unit ("CPU") tier and millions of instructions
per second ("MIPS") capacity license upgrade fees, which allow the customer to
run an already-licensed product on additional processing capacity that is
either currently needed or is anticipated to be needed in the future and (c)
license restructurings, wherein a customer pays a fee to relicense its
installed base of products at current volume-based discount levels, which has
the effect of increasing the discounts of record applicable to the customer's
installed base of products that are used in calculating future maintenance and
upgrade charges. For the Company's mainframe product lines, all of the
above-mentioned fees are calculated based on the processing capacity as
measured by CPU tier or by the aggregate MIPS on which the Company's products
are running. The license fees for the Company's open systems product lines are
based on the number of servers to which the products are licensed and the
processor speed of those servers. All license fees, upgrade fees, including
those for future additional processing capacity, and restructuring fees are
recognized as revenue when the license agreement is executed and the applicable
products (if any, in the case of upgrade fees) have been delivered.
License revenues in the quarter increased over the prior year quarter
primarily as a result of higher initial and subsequent copy license fees for
the Company's open systems products and higher upgrade fees associated with
current and future additional processing capacity. Open systems license fees,
along with higher mainframe-based MIPS-capacity upgrade fees associated with
future additional processing capacity, drove license revenue growth for the
nine-month period ended December 31, 1996. The license growth rate in the
three month period was 32% compared to 47% in the nine month period. This is
attributed to the particularly high level of license revenues in the third
quarter of the prior fiscal year.
For the three and nine month periods presented, North American license
revenues increased primarily as a result of increased license fees for the
Company's open systems products and an increase in mainframe-based
MIPS-capacity upgrade fees associated with future additional processing
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
capacity. Over half of the North American license revenues recognized in the
quarter and nine months ended December 31, 1996, was derived from enterprise
license transactions.
Increased sales of the Company's mainframe and open systems products and
upgrade fees for current additional processing capacity contributed to the
growth in international license revenues for the quarter and nine months ended
December 31, 1996. Foreign currency fluctuations reduced international license
revenues by approximately 1% in the quarter ended December 31, 1996.
The Company's mainframe license revenues, which comprised approximately
74% and 81% of total license revenues for the quarters ended December 31, 1996
and 1995, respectively, and 77% and 85% of total license revenues for the
respective nine-month periods, continue to be increasingly dependent upon large
enterprise license transactions. These customers are typically large
corporations and governmental entities who are heavily reliant on their
mainframe-based data centers and derive significant benefit from the Company's
products. An enterprise license agreement allows the customer to run an
unlimited number of copies of a product on its CPUs without regard to their
size, subject to a maximum limit in the aggregate power of the CPUs. At
specified intervals during the term of the agreement, or in some cases at the
end of the term, the licensee is required to pay additional charges if the
processing capacity on which the licensed products are being used exceeds the
stipulated level. The fees for future additional processing capacity typically
comprise from one-half to substantially all of the license fees included in an
enterprise license transaction, with restructuring fees representing a less
significant component. For the nine months ended December 31, 1996, the
aggregate of upgrade fees for future additional processing capacity and
restructuring fees represented 22% of total revenues. The failure of the
Company to consummate one or more of these large transactions anticipated to
close in any given quarter would materially impact the operating results for
that period.
MAINTENANCE REVENUES
Maintenance revenues represent annual maintenance fees charged to
perpetual license customers entitling them to product enhancements, technical
support services and ongoing compatibility with third-party operating systems,
subsystems and applications. Maintenance charges are generally 15% to 20% of
the license fee for the product at the time of renewal. Maintenance revenues
also include the pro rata recognition of bundled fees for first year
maintenance services covered by certain perpetual license agreements. All
maintenance fees are deferred at the time of billing and recognized ratably
over the term of the agreement.
For the quarter and nine months ended December 31, 1996, maintenance revenues
increased over the prior-year periods as a result of the continued growth in
the base of installed products, primarily due to the open systems growth and
the increase in license fees associated with mainframe CPU capacity discussed
above. A continued high level of maintenance renewal rates also fueled the
increase. Maintenance revenue in a particular period is impacted by the level
of license revenue in the preceding periods, the bundled fees for first-year
maintenance, customer mergers and outsourcing arrangements and restructuring
activity. As discussed under "License Revenues" above, restructuring
fees entitle a customer to higher, volume-based discounts that apply to
future maintenance and other
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
charges. This increased level of discounts has contributed significantly to
the reduction in the maintenance revenue growth rate over the past several
years.
PRODUCT LINE REVENUES
The Company's database management product lines comprise the
administrative tools and high performance utilities for IBM's IMS and DB2
mainframe database management systems. These product lines contributed
approximately 64% of total revenues and 62% of license revenues for the quarter
ended December 31, 1996, and approximately 65% and 64% of total and license
revenues, respectively, in the nine-month period. These product lines showed
combined total revenue growth of 21% and license revenue growth of 25% as
compared to the third quarter of the prior fiscal year. Year-to-date, the
database management products generated 26% growth in total and 34% in license
revenue growth.
The Company's open systems product lines include primarily the PATROL
application and database management products, the PATROL DB data administration
and management products and the backup and recovery utilities from DataTools,
Inc. (for whom the Company acts as an exclusive distributor). In the
aggregate, the total revenues from these products grew 96% and license revenues
grew 89% as compared to the quarter ended December 31, 1995. For the
nine-month period, total revenues for these product lines grew approximately
140%, and license revenues grew approximately 132%. These products contributed
20% of total revenues and 26% of license revenues for the third quarter of
fiscal 1997 and 17% and 23% of total and license revenues, respectively, for
the nine-month period.
EXPENSES
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- -------------------
(in thousands) (in thousands)
1996 1995 Change 1996 1995 Change
--------- --------- ------ --------- -------- ------
Selling and marketing $40,094 $32,281 24.2% $113,355 $ 79,100 43.3 %
Research and development 20,056 15,729 27.5% 57,748 43,036 34.2 %
Cost of maintenance services
and product licenses 13,657 11,367 20.1% 40,793 32,094 27.1 %
General and administrative 12,343 11,176 10.4% 34,021 27,003 26.0 %
Acquired research and
development -- 23,589 N/A 11,259 23,589 (52.3)%
------- ------- -------- --------
Total operating expenses $86,150 $94,142 $257,176 $204,822
======= ======= ======== ========
Overall, the expense growth rates in the quarter are lower than in the nine
month period, as compared to the respective periods in the prior fiscal year.
This is predominantly attributed to the relatively high level of revenues in the
third quarter of fiscal 1996, and the commensurate high level of variable
expenses in that quarter. Below is a discussion of each of the primary
categories of expenses.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
SELLING AND MARKETING EXPENSES
Selling and marketing expenses represented the largest absolute growth of
the Company's operating expenses in both the three months and nine months ended
December 31, 1996 over prior period levels. Growth from the third quarter of
fiscal 1996 to the third quarter of fiscal 1997 was primarily due to increases
in sales commissions, personnel costs and advertising fees. Sales commissions
increased as a direct result of the 32% increase in license revenues.
Personnel costs increased as the result of a 33% increase in headcount
(primarily open systems sales representatives and pre-sales support and
marketing personnel) from December 31, 1995 to December 31, 1996. Other
contributors to the increase were certain marketing and advertising activities
and travel expenses. Growth in selling and marketing expenses from the nine
months ended December 31, 1995 to the nine months ended December 31, 1996 was
primarily caused by increases in sales commissions, personnel costs and travel
expenses. As a percentage of total revenues, selling and marketing expenses
were unchanged at 27% in the third quarter of fiscal 1997 from the third
quarter of fiscal 1996; however, selling and marketing expenses increased from
26% in the nine months ended December 31, 1995 to 28% in the nine months ended
December 31, 1996.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expense increases were primarily attributable to
the addition of permanent and contract personnel who were hired to develop new
product offerings and, to a lesser extent, support existing products. Research
and development headcount from December 31, 1995 to December 31, 1996,
including contract developers, increased by 28%. Growth in research and
development expenses during the three and nine months ended December 31, 1996
from prior year comparable periods was also caused by increased commissions
paid to product authors from the sale of software licenses. These increases
have been offset during the three and nine months ended December 31, 1996
compared to the same periods in fiscal 1996 by an increase in software
capitalization and by decreases in hardware costs within the Company's data
center. For the third quarter of fiscal 1997, the Company capitalized
$5,230,000 in software development costs. In the third quarter of fiscal 1996,
the Company capitalized $4,237,000 in software development costs. The Company
capitalized $15,518,000 and $12,733,000 in software development costs during
the nine months ended December 31, 1996 and the nine months ended December 31,
1995, respectively.
COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES
Cost of maintenance services and product licenses expenses consist of
amortization of purchased and internally developed software, costs associated
with technical support operations and royalty fees. These costs have increased
in the third quarter of fiscal 1997 primarily as a result of increased product
licenses costs due to increased amortization of purchased and internally
developed software and increases in royalty fees. During the three months
ended December 31, 1996, the Company accelerated the amortization of some of
its older products which also led to the increase in cost of maintenance
services and product licenses. As a percentage of total revenues, these
expenses have decreased slightly in each of the three and nine month periods
ended December 31, 1996.
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13
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
For the third quarter of fiscal 1997, the Company's amortization of
internally developed software costs totaled $1,970,000 versus $1,553,000 in
the third quarter of fiscal 1996. The Company's amortization of internally
developed software costs totaled $6,274,000 and $6,432,000 during the nine
months ended December 31, 1996 and 1995, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company's general and administrative expenses for the third quarter of
fiscal 1997 increased by 10% over the comparable period in fiscal 1996. For
the nine months ended December 31, 1996 versus the nine months ended December
31, 1995, general and administrative expenses increased by 26%. The increase
for both periods is largely related to personnel costs associated with a 8%
increase in headcount and increases in professional fees and management
bonuses. As a percentage of total revenues, general and administrative
expenses have decreased from 9% to 8% for the three months ended December 31,
1996 and the three months ended December 31, 1995, respectively. For the nine
months ended December 31, 1996 and December 31, 1995, these percentages have
remained constant at approximately 9%.
OTHER INCOME
For the third quarter of fiscal 1997, other income was $5,300,000,
reflecting an increase of 34% over $3,956,000 of other income in the same
quarter of fiscal 1996. Other income consists primarily of interest earned on
tax-exempt municipal securities, auction preferred stock, Eurodollar deposits,
corporate debt securities, financed receivables, collateralized mortgage
obligations and money market funds. The increase in other income is primarily
due to the increase in cash available for investment.
INCOME TAXES
For the third quarter of fiscal 1997, income tax expense was $21,109,000,
compared to $15,749,000 for the same quarter in fiscal 1996. The Company's
income tax expense represents the federal statutory rate of 35%, plus certain
state taxes, reduced by the benefit from the Company's Foreign Sales
Corporation, the effect of tax exempt interest earned from cash investments,
the effect of tax deductions on certain technology acquisitions and foreign
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth through funds generated from
operations. As of December 31, 1996, the Company had cash, cash equivalents
and investment securities of $492,315,000.
During the quarter ended December 31, 1996, the Company did not repurchase
any shares of its common stock. As of December 31, 1996, the Company was
authorized, by its Board of Directors, to repurchase up to 5,570,000 additional
shares of the Company's common stock.
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14
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
The Company believes that existing cash balances and funds generated from
operations will be sufficient to meet its liquidity requirements for the
foreseeable future.
B. FORWARD LOOKING INFORMATION AND CERTAIN RISKS AND UNCERTAINTIES THAT COULD
AFFECT FUTURE OPERATING RESULTS.
The forward looking statements made in the above Management's Discussion
and Analysis of Results of Operations and Financial Condition include
statements regarding the continued significance of enterprise license
transactions and the Company's ability to meet its future liquidity
requirements.
Numerous important factors affect the Company's operating results and
could cause the Company's actual results to differ materially from the results
indicated in this discussion or in any other forward looking statements made
by, or on behalf of the Company. There can be no assurance that future results
will meet expectations. These important factors include, but are not limited
to those described in the following paragraphs.
Future revenues, earnings and stock prices may be subject to wide swings,
particularly on a quarterly basis in response to variations in operating and
financial results, perceived revenue growth rates and other factors. The stock
price of software companies in general, and the Company in particular, is
primarily based on expectations of future revenue and earnings growth. The
Company's stock price has been highly volatile over the last several years.
Any failure of revenues or earnings to meet expected levels in a period would
likely have a significant adverse effect on the Company's stock price. The
timing and amount of the Company's license revenues are subject to a number of
factors that make estimation of operating results prior to the end of a quarter
extremely uncertain. The Company generally operates with little or no sales
backlog and, as a result, license revenues in any quarter are dependent on
contracts entered into or orders booked and shipped in that quarter. Most of
the Company's sales are closed at the end of each quarter, and there has been
and continues to be a trend toward larger single enterprise license
transactions, which can have extended sales cycles and are less predictable.
The timing of closing large license agreements also increases the risks of
quarter-to-quarter fluctuations and the uncertainty of estimating quarterly
operating results. Failure to close an expected individually significant
transaction could cause the Company's revenues and earnings in a period to fall
short of expectations. The Company generally does not know whether revenues
and earnings will meet expected results until the last days of a quarter.
CPU upgrade fees and enterprise license transactions are a substantial and
integral component of the Company's mainframe business, and the percentage of
license revenues contributed by enterprise license transactions has increased
over the last three fiscal years. Through the nine months ended December 31,
1996, the enterprise license fees for future additional processing capacity and
license restructurings comprised 22% of total revenues. The Company's future
operating results are dependent upon customers' continued requirements for, and
investment in, their mainframe systems software and their continued need to use
the Company's existing software products on substantially greater mainframe
processing capacity. The Company believes that the demand for
enterprise
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15
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
licenses has been driven by customers' re-commitment over the last 18 to 24
months to the MVS mainframe platform for large scale, transaction intensive
information systems. Whether this trend will continue is difficult to predict.
There can be no assurance that these trends of MIPS growth and of customers
using the Company's current mainframe products on more powerful computers will
continue or that demand for enterprise license transactions will be sustained;
if it is not, the Company's financial results would likely be materially and
adversely affected.
The Company derives over 80% of its total revenues from software products
for IBM and IBM-compatible mainframe computers. IBM is attempting to reduce
the overall software costs associated with the MVS mainframe platform and is
continuing to enhance its utilities for IMS and DB2 to provide lower cost
alternatives to those provided by BMC and other independent software vendors.
The Company has traditionally maintained sufficient performance and functional
advantages over IBM's base utilities, although there can be no assurance that
it will continue to maintain such advantages.
Upgrade fees have historically provided approximately 24% to 27% of the
Company's total revenues. The charging of upgrade fees based on CPU tier
classifications is standard among mainframe systems software vendors, including
IBM. The pricing of mainframe systems software, including the charging of
tier-based upgrade fees or other capacity-based fees, is under continued
pressure from customers. The Company believes its current pricing policies
most properly reflect the value provided by its products. IBM provides
alternatives to tier-based pricing with respect to its large mainframe CPUs and
is attempting to reduce the costs of its mainframe systems software to increase
the overall cost competitiveness of its mainframe computing platforms. These
actions have increased pricing pressures within the mainframe systems software
markets. The advent of IBM's "Sysplex" pricing of its mainframe systems
software when installed in a complex of coupled mainframe CPU's may
additionally increase these pricing pressures. If changes in mainframe systems
software pricing or increased competition were to result in significant price
decreases that were not offset by sales volume increases, the Company's
business and financial results would be adversely affected.
Future operating results are also dependent on sustained improvement of
the Company's international operating results, which have been inconsistent
over the last three fiscal years. The Company's operations and financial
results could be significantly adversely affected by factors associated with
international operations, including changes in foreign currency exchange rates,
uncertainties relative to regional economic circumstances and difficulties in
staffing and managing international operations.
Operating income as a percentage of revenues, excluding the impact of
acquired research and development costs ("Operating Margins"), remained
relatively unchanged in the nine months ended December 31, 1996, versus the
prior comparable nine month period. Since the Company's costs are to a large
extent fixed in the short term and are planned primarily based on sales
forecasts, failure to achieve planned revenue growth in a period would likely
have a material adverse affect on Operating Margins and net earnings. The
Company has increased its expenditure levels significantly in fiscal
1996 and in the first nine months of fiscal 1997 on its open systems
initiatives, with the investment being targeted primarily to research and
development, sales and pre-sales personnel. The Company intends to continue
such increased investment, which will place additional pressure on its
Operating
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
Margins, particularly if revenue expectations are not met by its open
systems products. Sales, support and distribution costs for client/server
software products are generally higher, as a percentage of sales, than for
mainframe products, because of lower unit prices, more widely dispersed
customers and prospects and intense competition. The Company is developing
indirect channels through major open systems vendors to increase its coverage
and presence in open systems markets in a cost effective manner. There can be
no assurance that this strategy will be effective, however. Although the
Company has made significant progress in implementing reseller and distribution
arrangements for PATROL, open systems indirect sales were not material in the
first three quarters of fiscal 1997. If the Company's direct sales force
remains the primary channel for its client/server products, its cost of sales
will likely increase and Operating Margins could be reduced.
The Company's ability to sustain growth depends in part on the timely
development or acquisition of successful new and updated products. The
Company's growth prospects are dependent upon the success of its open systems
products. Software development is, however, a complex and creative process
that can be difficult to accurately schedule and predict, and the Company has
experienced long development cycles and product delays in the past and expects
to have delays in the future. Delays in new mainframe or client/server product
introductions or less-than-anticipated market acceptance of these new products
are possible and would have an adverse effect of the Company's revenues and
earnings. New products or new versions of existing products may, despite
testing, contain undetected errors or bugs that will delay the introduction or
adversely affect commercial acceptance of such products. The Company's
strategic plans and business models contemplate significant revenue growth from
its open systems product families. This market is highly dynamic and is
characterized by rapid change and intense competition. Many of the Company's
competitors and potential competitors have significantly greater financial,
technical, sales and marketing resources than the Company and greater
experience in open systems development and sales. A key factor in determining
the success of the Company's products, particularly its open systems offerings,
will be its ability to interoperate and perform well with existing and future
leading database management systems and other systems software products
supported by the Company's products. While the Company believes its products
that address this market, including those under development, will compete
effectively, this market will be relatively unpredictable over the next few
years and there can be no assurance that anticipated results will be achieved.
The emergence of the Internet and enterprise intranets as potential
alternatives to the client/server paradigm heightens such unpredictability.
Litigation seeking to enforce patents, copyrights and trade secrets is
increasing in the software industry. There can be no assurance that a third
party will not assert that its patents or other proprietary rights are violated
by products offered by the Company. Any such claims, with or without merit,
can be time consuming and expensive to defend and could have an adverse effect
on the Company's business, results of operations, financial position and cash
flows.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company filed a lawsuit styled BMC SOFTWARE, INC. VS. PEREGRINE
SYSTEMS, INC. ET AL., Cause No. 95-10161, in the 200th Judicial District Court
of Travis County, Texas, in August 1995. The lawsuit seeks an injunction
prohibiting four former employees and their employers, among other things, from
using the Company's confidential information and trade secrets in the
development of products similar to the products on which they worked while
employed by the Company. The defendants have filed several counterclaims
against the Company, alleging that the Company has tortiously interfered with
Peregrine Systems, Inc.'s business relations, breached its nondisclosure
agreements with the individual defendants, violated Section 15.05(a) of the
Texas Free Enterprise and AntiTrust Act and misappropriated certain trade
secrets and confidential information belonging to Peregrine/Bridge Transfer
Corporation in violation of a confidentiality agreement between the Company and
Peregrine Systems, Inc. The defendants' counterclaims seek injunctive relief
preventing the Company from using Peregrine/Bridge Transfer Corporation's trade
secrets and confidential information allegedly disclosed to the Company, a
declaratory judgment that the Company's trade secrets and confidential
information at issue are unqualified for protection as trade secrets or
confidential information and actual and exemplary monetary damages. Management
believes the ultimate resolution of the above matters will not be material to
the Company's financial condition.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BMC SOFTWARE, INC.
Date: By:/s/ Max P. Watson Jr.
-------------------- ------------------------------------
Max P. Watson Jr.
Chairman of the Board, President and
Chief Executive Officer
Date: By:/s/ William M. Austin
-------------------- ------------------------------------
William M. Austin
Chief Financial Officer
Date: By:/s/ Kevin M. Klausmeyer
-------------------- ------------------------------------
Kevin M. Klausmeyer
Chief Accounting Officer
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EXHIBIT INDEX
27 -- Financial Data Schedule