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 June 30, 1998
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 August 12, 1998, there were outstanding 215,266,385 shares of Common
Stock, par value $.01, of the registrant.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Quarter Ended June 30, 1998
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
March 31, 1998 (Unaudited) and June 30, 1998 3
Condensed Consolidated Statements of Earnings
Three months ended June 30, 1997 and 1998
(Unaudited) 5
Condensed Consolidated Statements of Cash Flows Three months
ended June 30, 1997 and 1998
(Unaudited) 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
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3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, June 30,
ASSETS 1998 1998
---------- ----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 72,093 $ 154,453
Investment securities 56,174 58,483
Trade accounts receivable 170,778 163,483
Income tax receivable 40,805 --
Prepaid expenses and other 34,028 48,014
---------- ----------
Total current assets 373,878 424,433
Property and equipment, net 162,996 179,315
Software development costs, net 63,475 70,851
Purchased software, net 32,063 33,899
Investment securities 587,806 732,391
Deferred charges and other assets 28,277 33,418
---------- ----------
$1,248,495 $1,474,307
========== ==========
See accompanying notes to condensed consolidated financial statements.
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4
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(continued)
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
----------- -----------
(Unaudited)
Current liabilities:
Trade accounts payable $ 11,361 $ 8,501
Accrued liabilities and other 81,352 107,711
Current portion of deferred revenue 242,821 316,050
----------- -----------
Total current liabilities 335,534 432,262
Long-term liabilities:
Deferred revenue and other 110,350 156,711
Other long-term liabilities 43,454 48,641
----------- -----------
Total long-term liabilities 153,804 205,352
----------- -----------
Total liabilities 489,338 637,614
Stockholders' equity:
Common stock 2,101 2,173
Additional paid-in capital 129,134 126,122
Retained earnings 729,889 788,535
Foreign currency translation adjustment (1,543) (1,448)
Unrealized gain on securities available for sale 3,179 4,507
----------- -----------
862,760 919,889
Less treasury stock 99,513 78,397
Less unearned portion of restricted stock compensation 4,090 4,799
----------- -----------
Total stockholders' equity 759,157 836,693
----------- -----------
$ 1,248,495 $ 1,474,307
=========== ===========
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
June 30,
1997 1998
--------- --------
Revenues:
Licenses $ 107,746 $160,505
Maintenance 50,668 65,100
--------- --------
Total revenues 158,414 225,605
Operating expenses:
Selling and marketing 47,401 64,862
Research and development 20,769 33,829
Cost of maintenance services and product licenses 17,515 22,905
General and administrative 11,189 16,202
Acquired research and development and related costs 60,272 17,304
--------- --------
Total operating expenses 157,146 155,102
--------- --------
Operating income 1,268 70,503
Other income 6,148 9,944
--------- --------
Earnings before taxes 7,416 80,447
Income taxes 17,979 21,801
--------- --------
Net earnings (loss) $ (10,563) $ 58,646
========= ========
Basic earnings (loss) per share $ (0.05) $ 0.27
========= ========
Shares used in computing basic earnings (loss) per share 202,078 214,132
========= ========
Diluted earnings per share $ (0.05) $ 0.26
========= ========
Shares used in computing diluted earnings per share 216,166 227,414
========= ========
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)
Three Months Ended
June 30,
1997 1998
--------- ---------
Cash flows from operating activities:
Net earnings (loss) $ (10,563) $ 58,646
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Acquired research and development costs 60,272 17,304
Depreciation and amortization 11,585 11,767
Net change in receivables,
payables and other items 26,274 163,751
--------- ---------
Total adjustments
98,131 192,822
--------- ---------
Net cash provided by operating activities 87,568 251,468
Cash flows from investing activities:
Technology acquisitions, net of cash acquired (51,187) (2,000)
Purchased software and related assets (947) (495)
Capital expenditures (12,608) (21,744)
Capitalization of software development (9,278) (11,168)
Purchases of securities held to maturity (14,498) (154,239)
Proceeds from securities held to maturity 9,643 8,673
(Increase) decrease in long-term finance receivables (224) (5,249)
--------- ---------
Net cash used in investing activities (79,099) (186,222)
Cash flows from financing activities:
Income tax reduction relating to stock options 6,227 10,138
Stock options exercised and other 6,607 6,881
Treasury stock acquired (933) --
--------- ---------
Net cash used in financing activities 11,901 17,019
Effect of exchange rate changes on cash 182 95
--------- ---------
Net change in cash and cash equivalents 20,552 82,360
Cash and cash equivalents at beginning of period 79,794 72,093
--------- ---------
Cash and cash equivalents at end of period $ 100,346 $ 154,453
========= =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 2,489 $ --
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, 1998,
as filed with the Securities and Exchange Commission on Form 10-K.
Note 2 - Earnings Per Share
The Company presents its earnings per share in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". SFAS No. 128 requires dual presentation of earnings per share (EPS);
basic EPS and diluted EPS. Basic EPS excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. For purposes of this calculation, outstanding stock options
and unearned restricted stock are considered common stock equivalents using the
treasury stock method. The following table summarizes the basic EPS and diluted
EPS computations for the three months ended June 30, 1997 and 1998 (in
thousands, except per share amounts):
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended
June 30,
1997 1998
--------- --------
Basic earnings per share:
Net earnings $ (10,563) $ 58,646
--------- --------
Weighted average number of common shares 202,078 214,132
--------- --------
Basic earnings per share $ (0.05) $ 0.27
========= ========
Diluted earnings per share:
Net earnings $ (10,563) $ 58,646
--------- --------
Weighted average number of common shares 202,078 214,132
Incremental shares from assumed conversions-
stock options and other 14,088 13,282
--------- --------
Adjusted weighted average number of common shares 216,166 227,414
--------- --------
Diluted earnings per share $ (0.05) $ 0.26
========= ========
Note 3 - Stock Split
On April 20, 1998, the Company's board of directors declared a
two-for-one stock split. The stock split was effected in the form of a stock
dividend. The stockholders of record received one share of common stock for each
share held. All stock related data in the condensed consolidated financial
statements and related notes reflect this stock split for all periods presented.
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Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This section of the Form 10-Q includes historical information for the
periods covered, certain forward looking information and the information
provided below under the heading "Certain Risks and Uncertainties That Could
Affect Future Operating Results" about certain risks and uncertainties that
could cause the Company's future operating results to differ from the results
indicated by any forward looking statements made by the Company or others. It is
important that the historical discussion below be read together with the
attached condensed consolidated financial statements and notes thereto, with
the discussion of such risks and uncertainties and with the audited
financial statements and notes thereto, and the Management's Discussion and
Analysis of Results of Operations and Financial Condition, contained in the
Company's Form 10-K for fiscal 1998.
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. These comparisons of financial results are not
necessarily indicative of future results.
Percentage of Total Revenues
----------------------------
Three Months Ended
June 30,
1997 1998
---------- ----------
Revenues:
License 68.0% 71.1%
Maintenance 32.0 28.9
---------- ----------
Total revenues 100.0 100.0
Operating expenses:
Selling and marketing 30.0 28.7
Research and development 13.1 15.0
Cost of maintenance services
and product licenses 11.0 10.1
General and administrative 7.1 7.2
Acquired research and development costs 38.0 7.7
---------- ----------
Operating income .8 31.3
Other income 3.9 4.4
---------- ----------
Earnings before taxes 4.7 35.7
Income taxes 11.4 9.7
---------- ----------
Net earnings (loss) (6.7)% 26.0%
========== ==========
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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
June 30,
(in thousands)
1997 1998 Change
-------- -------- --------
North American license revenues $ 75,200 $114,252 51.9%
International license revenues 32,546 46,253 42.1%
-------- --------
Total license revenues 107,746 160,505 49.0%
Maintenance revenues 50,668 65,100 28.5%
-------- --------
Total revenues $158,414 $225,605 42.4%
======== ========
Product Line Revenues
The Company's products for the IBM-compatible mainframe environment
accounted for 84% and 75% of total revenues in the quarters ended June 30, 1997
and 1998. The database utilities and administrative tools for IBM's IMS and DB2
database management systems comprise the largest portion of the Company's
mainframe-based and total revenues. These product lines accounted for 65% and
55% of total revenues in the first quarters of fiscal 1998 and 1999,
respectively and 65% and 53% of license revenues for the same periods. Total
revenues and license revenues from these product lines grew 19% and 22%,
respectively in the first quarter of fiscal 1999. The Company's other products
for the mainframe environment contributed 19% and 20% of total revenues and 15%
and 19% of license revenues for the quarters ended June 30, 1997 and 1998,
respectively. Total revenues and license revenues for the Company's other
mainframe products grew 66% and 90%, respectively, in the first quarter of
fiscal 1999.
The Company's distributed systems product lines comprise the PATROL
application and database management solutions, the PATROL DB database
administration products and the Company's high-performance database backup and
recovery solutions. In total, these product lines contributed 16% and 25% of
total revenues for the quarters ended June 30, 1997 and 1998, respectively and
20% and 28% of license revenues for the same periods. Total revenues for these
product lines grew 114% and license revenues grew 105% in the first quarter of
fiscal 1999.
License Revenues
The Company's license revenues include product license fees, capacity-based
license upgrade fees and restructuring fees. Product license fees are generated
from the initial licensing of a product and subsequent licenses purchased under
the Company's per copy, central processing unit ("CPU") tier-based licensing
program. Capacity-based license upgrade fees are charged when a customer
acquires the right to run an already licensed product on additional processing
capacity, as measured by a CPU tier or by the aggregate processing capacity
measured in millions of instructions per second ("MIPS") of all CPUs for which
the Company's products are licensed. These license upgrade fees include fees
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
associated with customers' purchasing the right to operate a product with
currently installed additional processing capacity and/or with anticipated
future processing capacity. Restructuring fees increase the discounts associated
with a customer's installed base of products, which, therefore, reduce a
customer's future maintenance charges and capacity based upgrade fees pertaining
to such installed products.
The Company's North American operations generated 70% of total license
revenues in the quarter ended June 30, 1997 and 71% for the corresponding
quarter ended June 30, 1998. The 52% increase in North American license revenues
is primarily attributable to increased sales of the Company's distributed
systems products. Capacity-based upgrade fees for future capacity represented
the single largest component of North American license revenues for the quarter
ended June 30, 1998 and was a substantial contributor to such revenue growth
during the period. International license revenues represented 30% and 29% of
total license revenues for the quarters ended June 30, 1997 and 1998,
respectively. International license revenue growth from the first quarter of
fiscal 1998 to the comparable quarter of fiscal 1999 was derived principally
from capacity-based upgrade fees associated with future mainframe capacity and
from new license sales of the Company's distributed systems products.
Capacity-based upgrade fees include fees for both current and future
additional processing capacity. These fees accounted for 35% of total revenues
in both the first quarter of fiscal 1998 and 1999. The sustainability and growth
of the Company's mainframe-based license revenues are dependent upon these
capacity-based upgrade fees, particularly within its largest customer accounts.
Most of the Company's largest customers have entered into enterprise license
agreements allowing them to install the Company's products on an unspecified
number of CPUs, subject to a maximum limit on the aggregate power of the CPUs as
measured in MIPS. Additional fees are due if this limit is exceeded.
Substantially all of these transactions include upgrade charges associated with
additional processing capacity beyond the customer's current usage level and/or
a restructuring fee, and many include license fees for additional products. In
the quarters ended June 30, 1997 and 1998, the enterprise license fees for
future additional processing capacity and license restructurings comprised
approximately 26% and 27% of total revenues, respectively. The fees associated
with future additional mainframe processing capacity typically comprise from
one-half to substantially all of the license fees included in the enterprise
license transaction. The Company has experienced a strong increase in demand
from its largest customers for the right to run its products on increased
current and anticipated mainframe processing capacity as enterprises invest
heavily in their core OS/390 mainframe IT systems. The Company expects that it
will continue to be dependent upon these capacity-related license revenue
components. With the rapid advancement of distributed systems technology and
customers' needs for more functional and open applications, such as pre-packaged
ERP applications, to replace legacy systems, there can be no assurance that the
demand for mainframe processing capacity or the higher operating efficiencies
afforded by the Company's products will continue at current levels. Should this
trend slow dramatically or reverse, it would adversely impact the Company's
mainframe license revenues and its operating results.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
Maintenance and Support Revenues
Maintenance and support revenues represent the ratable recognition of fees
to enroll licensed products in the Company's software maintenance, enhancement
and support program. Enrollment entitles customers to product enhancements,
technical support services and ongoing compatibility with third-party operating
systems, database management systems and applications. These fees are generally
charged annually and equal 15% to 20% of the list price of the product at the
time of renewal, less any applicable discounts. Maintenance revenues also
include the ratable recognition of the bundled fees for any first-year
maintenance services covered by the related perpetual license agreement. The
Company continues to invest heavily in product maintenance and support and
believes that maintaining its reputation for superior product support is a key
component of its value pricing model.
Maintenance revenues have increased over the last three fiscal years as a
result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase as the
processing capacity on which the products are installed increases; consequently,
the Company receives higher absolute maintenance fees as customers install its
products on additional processing capacity. Due to increased discounting at
higher levels of additional processing capacity, the maintenance fees on a per
MIPS basis are typically reduced in enterprise license agreements. Historically,
the Company has enjoyed high maintenance renewal rates for its mainframe-based
products. Should customers migrate from their mainframe applications or find
alternatives to the Company's products, increased cancellations could adversely
impact the sustainability and growth of the Company's maintenance revenues. To
date, the Company has been successful in extending its traditional maintenance
and support pricing model to the distributed systems market. At this time, there
is insufficient historical data to determine whether customers will continue to
accept this pricing model and renew their maintenance and support contracts at
the levels experienced in the mainframe market.
EXPENSES
Three Months Ended
June 30,
------------------
(in thousands)
1997 1998 Change
-------- -------- ------
Selling and marketing expenses $ 47,401 $ 64,862 36.8 %
Research and development expenses 20,769 33,829 62.9 %
Cost of maintenance services
and product licenses 17,515 22,905 30.8 %
General and administrative expenses 11,189 16,202 44.8 %
Acquired research and
development 60,272 17,304 (71.3)%
-------- --------
Total operating expenses $157,146 $155,102 (1.3)%
======== ========
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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
The Company's selling and marketing expenses include personnel and related
costs, sales commissions and costs associated with advertising, industry trade
shows and sales seminars. Personnel costs were the largest single contributor to
the expense growth in the first quarter of fiscal 1999. Selling and marketing
headcount increased by 54% from June 30, 1997 to June 30, 1998. This increase
was primarily attributable to significant increases in the Company's open
systems sales representatives and technical sales support consultants. Sales
commissions increased in the first quarter of fiscal 1999 as a result of the 49%
increase in license revenues. Ongoing commission plan adjustments held sales
commission expense growth below license revenue growth. Marketing costs have
continued to increase to meet the requirements of marketing a greater number of
increasingly complex distributed systems products and of supporting a growing
indirect distribution channel. Other contributors to the increase were
significantly higher levels of travel and trade show activity and the opening of
additional field sales offices.
Research And Development
Research and development expenses mainly comprise personnel costs related
to software developers and development support personnel, including software
programmers, testing and quality assurance personnel and writers of technical
documentation such as product manuals and installation guides. These expenses
also include computer hardware/software costs and telecommunications expenses
necessary to maintain the Company's data processing center. Increases in the
Company's research and development expenses in the first quarter of fiscal 1999
were the result of increased compensation costs associated with both software
developers and development support personnel, as well as associated benefits and
facilities costs. The Company increased its headcount in the research and
development organization by 61% from June 30, 1997 to June 30, 1998. Research
and development costs were reduced by amounts capitalized in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86. The Company
capitalizes its software development costs when the projects under development
reach technological feasibility as defined by SFAS No. 86. During the first
quarter of fiscal 1998 and 1999, the Company capitalized approximately
$9,279,000 and $11,168,000, respectively, of software development costs. The
growth in capitalized costs is primarily due to increases in new distributed
systems product development, the porting of distributed systems products to
alternate environments and in increased integration development activity.
Cost of Maintenance Services and Product Licenses
Cost of maintenance services and product licenses consists of amortization
of purchased and internally developed software, costs associated with the
maintenance, enhancement and support of the Company's products and royalty fees.
Growth in the cost of maintenance services and product licenses from the first
quarter of fiscal 1998 to the first quarter of fiscal 1999 was primarily
attributable to increases in customer support employees and purchased software
amortization. Maintenance costs are increasing as a percentage of maintenance
fees as the Company's revenue mix shifts to distributed
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
systems. The Company amortized $4,493,000 and $3,792,000 in the first quarter of
fiscal 1998 and 1999, respectively, of capitalized software development costs
pursuant to SFAS No. 86. In these periods, the Company expensed $2,900,000 and
$1,094,000, respectively, of capitalized software development costs to
accelerate the amortization of certain software products. These software
products were not expected to generate sufficient future revenues which would be
required for the Company to realize the carrying value of the assets. The
Company expects its cost of maintenance services and product licenses will
continue to increase as the Company capitalizes a higher level of software
development costs and as the Company builds its distributed systems product
support organization, which is less cost-effective than its mainframe support
organization because of the complexity and variability of the environments in
which the products operate. The distributed systems products operate in a high
number of operating environments, including operating systems, DBMSs and ERP
applications and require greater ongoing platform support development activity
relative to the Company's OS/390 mainframe products.
General and Administrative
General and administrative expenses are comprised primarily of compensation
and personnel costs within executive management, finance and accounting, product
distribution, facilities management and human resources. Other expenses included
in general and administrative expenses are fees paid for legal and accounting
services, consulting projects, insurance and costs of managing the Company's
foreign currency exposure. Growth in general and administrative expenses from
the first quarter of fiscal 1998 to the first quarter of fiscal 1999 was largely
due to increased personnel costs and higher costs associated with the related
infrastructure to support the Company's growth. Headcount within the general and
administrative organizations grew by 49% from June 30, 1997 to June 30, 1998.
Acquired Research and Development and Related Costs
During the first quarter of fiscal 1998, the Company completed the
acquisitions of stock and assets (including in-process research and development)
of certain technology companies for an aggregate purchase price of $80,700,000
million, including direct acquisition costs. The Company accounted for these
transactions using the purchase method of accounting. During the quarter, the
Company recorded a $60,272,000 charge ($57,267,000 net of income tax benefits),
for acquired research and development costs.
During the first quarter of fiscal 1999, the Company acquired certain
technology and technology rights for approximately $23,700,000, including
direct acquisition costs. During the quarter, the Company recorded a $17,304,000
charge ($11,246,000 net of income tax benefit), for acquired research and
development and related costs.
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
OTHER INCOME
For the first quarter of fiscal 1999, other income was $9,944,000,
reflecting an increase of 62% over $6,148,000 of other income in the same
quarter of fiscal 1998. Other income consists primarily of interest earned on
tax-exempt municipal securities, euro bonds, corporate bonds, mortgage
securities and money market funds. The increase in other income is primarily due
to an increase of approximately $375,883,000 in cash and investment securities
from June 30, 1997 to June 30, 1998.
INCOME TAXES
For the first quarter of fiscal 1999, income tax expense was $21,801,000
compared to $17,979,000 for the same quarter in fiscal 1998. 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 June 30, 1998, the Company had cash, cash equivalents and
investment securities of $945,327,000.
The Company did not repurchase any shares on the open market during the
first quarter of fiscal 1999 as its stock repurchase program was rescinded by
the board of directors in connection with the pooling of interests transaction
with BGS Systems, Inc. As of June 30, 1998, the Company has authorization from
its Board of Directors, to acquire up to 3,764,800 shares of its common stock
pursuant to the Company's stock repurchase program.
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. CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS.
Management's Discussion and Analysis of Results of Operations and Financial
Condition contain certain forward looking statements within the meaning of
Sections 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended, which are identified by the use of the words
"believes," "expects," "anticipates," "will," "contemplates" and "would" and
similar expressions that contemplate future events. Numerous important factors,
risks and uncertainties affect the Company's operating results and could cause
the Company's actual results to differ materially from the results implied by
these or 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, risks and uncertainties include, but are not limited
to, those described in the following paragraphs and in the discussion in the
Company's March 31, 1998 Annual Report under the heading
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BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Results of
Operations and Financial Condition
(continued)
"Business," including, without limitation, the discussion under the subheading
"Competition, System Dependence."
The Company's stock price has historically been highly volatile. Future
revenues, earnings and stock prices may be subject to wide swings in response to
variations in operating and financial results, anticipated revenue and/or
earnings growth rates, competitive pressures and other factors. The stock price
of software companies in general, and the Company in particular, is based on
expectations of sustained future revenue and earnings growth rates. Any failure
to meet anticipated revenue and earnings levels in a period or any negative
change in the Company's perceived long-term growth prospects would likely have a
significant adverse effect on the Company's stock price. The growth rates of the
Company's license revenues, total revenues, net earnings and earnings per share,
excluding charges for acquired research and development and merger costs, have
accelerated over the last 24 months. The Company's current valuation reflects
expectations based on these higher rates of growth. The Company may not achieve,
in future periods, these relatively higher rates of growth.
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
upon contracts entered into or orders booked and shipped in that quarter. Most
of the Company's mainframe and distributed systems license sales are closed at
the end of each quarter, and there has been and continues to be a trend toward
larger enterprise license transactions, which can have sales cycles of up to a
year or more and require approval by a customer's upper management. These
transactions are typically difficult to manage and predict. Failure to close an
expected individually significant transaction could cause the Company's revenues
and earnings in a period to fall short of expectations. Other factors that may
cause significant fluctuations in the Company's quarterly revenues include
competition, industry or technological trends, customer budgetary decisions,
mainframe processing capacity growth, general economic conditions or
uncertainties, mainframe industry pricing and other trends, announcements of new
hardware or software products, the timing of price increases and the factors
described in this section of the Form 10-Q. The Company generally does not know
whether revenues and earnings will meet expected results until the final days or
day of a quarter.
The Company derived approximately 74% of its total revenues in fiscal 1998
from software products for IBM and IBM-compatible mainframe computers;
approximately 58% of total revenues and a higher percentage of earnings were
contributed by the Company's high availability utilities for IMS and DB2
administration products. IBM continues to focus on reducing the overall software
costs associated with the OS/390 mainframe platform. Further, IBM continues,
directly and through third parties, to improve its base and enhanced utilities
for IMS and DB2 to provide lower cost alternatives to those provided by the
Company and other independent software vendors. IBM has significantly increased
its level of activity in the IMS and DB2 high speed utility markets over the
last twelve months. The Company has traditionally maintained sufficient
performance and functional advantages over
16
17
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
IBM's base utilities to justify its pricing differential although there can be
no assurance that it will continue to maintain such advantages.
Fees from enterprise license transactions remain fundamental components of
the Company's revenues and the primary source of mainframe revenues. These
revenues depend on the Company's customers' continuing to perceive an increasing
need to use the Company's existing software products on substantially greater
mainframe processing capacity in future periods. The Company believes that the
demand for enterprise licenses has been driven by customers' recommitment over
the last 24 to 36 months to the OS/390 mainframe platform for large scale,
transaction intensive information systems. Whether this trend will continue is
difficult to predict. If the Company's customers' processing capacity growth
were too slow and/or if such customers were to perceive less relative benefit
from the Company's current mainframe products, the Company's revenues would be
adversely affected.
Capacity-based upgrade fees associated with both current and future
processing capacity contributed 23%, 29% and 33% of total revenues in fiscal
years 1996, 1997 and 1998. The charging of upgrade fees based on CPU tier
classifications is standard among mainframe systems software vendors, including
IBM. While the Company believes its current pricing policies properly reflect
the value provided by its products, the pricing of mainframe systems software is
under constant pressure from customers and competitive vendors, including IBM.
IBM continues to reduce the costs of its mainframe systems software to increase
the overall cost competitiveness of its mainframe hardware and software
products. IBM also generally charges significantly less for its software
products. These actions continue to increase pricing pressures within the
mainframe systems software markets. The Company has continued to reduce the cost
of its mainframe tools and utilities in response to these and other competitive
pressures.
The Company's operating expenses are to a large extent fixed in the short
term so that the Company has very limited ability to adjust its planned expenses
if revenues fail to meet expectations. If near-term demand for the Company's
products weakens in a given quarter or if forecasted large transactions fail to
close, there would likely be an immediate, material adverse effect on net
revenues and operating results and a resultant drop in its stock price.
The Company's operating margins (exclusive of charges for acquired research
and development and merger costs) have ranged from 37% to 45% in recent
quarters, which is at the high-end of the range for peer companies. The Company
does not expect future margin expansion. Further, since research and
development, sales, support and distribution costs for distributed systems
software products are higher than for mainframe products, operating margins will
experience more pressure as the mix of the Company's business continues its
shift to distributed systems revenues.
The Company has historically realized greater revenues and net earnings in
the latter half of its fiscal year; the quarter ending December 31 coincides
with the end of customers' annual budgetary periods and the quarter ending March
31 coincides with the end of the Company's annual sales plans and fiscal year.
For the same reasons, the Company has typically reported lower or flat revenues
in
17
18
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
the first two quarters of a fiscal year compared to the last two quarters of the
previous year, resulting in lower operating margins in the first two quarters.
The Company historically has generated greater revenues in the third and fourth
quarters while maintaining lower rates of expense growth and expanded operating
margins in the first two quarters. Past financial performance is not a reliable
indicator of future performance, and there can be no assurance that this pattern
will be maintained.
Future operating results are also dependent on sustained performance by the
Company's international offices, particularly its European operations. Revenue
growth by the Company's European operations has been slower than revenue growth
in North America. There can be no assurance that the Company will be successful
in accelerating the revenue growth of its European operations. The Company's
operations and financial results internationally could be significantly
adversely affected by several risks such as changes in foreign currency exchange
rates, sluggish regional economic conditions and difficulties in staffing and
managing international operations. Many systems and applications software
vendors are experiencing difficulties internationally. In particular, the recent
Asian economic crisis has resulted in customer budget cuts and financial
uncertainty. Less than 5% of the Company's revenues are generated in the Pacific
Rim region.
In fiscal 1998, the Company announced several executive management and
organizational changes involving its Chief Operating Officer, Senior Vice
President, Research and Development, and Senior Vice President, European Sales.
The Company may make other management and organizational changes in the future.
Organizational and management changes are intended to enhance competitiveness,
productivity and execution; however, there can be no assurance that they will
produce the desired results.
The Company's growth prospects depend heavily on the continued success of
its existing distributed systems products, including PATROL, the recently
acquired BGS and DataTools products and those anticipated to be introduced in
the future. The distributed systems and application management markets in which
the Company operates are emerging, fragmented and highly competitive. The
Company has experienced long development cycles and product delays in the past,
particularly with certain of its distributed systems products, and expects to
have delays in the future. Delays in new mainframe or distributed systems
product introductions or less-than-anticipated market acceptance of these new
products are possible and would have an adverse affect on 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 enterprise systems
management market that the Company's distributed systems products address is
characterized by rapid change and intense competition that continues to increase
as vendors within the broader markets converge. Certain of the Company's
competitors and potential competitors have significantly greater financial,
technical, sales and marketing resources than the Company and greater experience
in distributed systems development and sales. A key factor in determining the
success of the Company's products, particularly its
18
19
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
distributed systems offerings, will be their 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. Maintaining this
interoperability has greatly increased the complexity and cost of the Company's
product development and support activities. 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.
When the Company acquired BGS, it also announced its ASA strategy. The ASA
strategy contemplates the development of solutions suites that will ensure the
availability, performance and recoverability of an ERP, DBMS or operating
system. These solution suites will contain several of the Company's existing
products as well as those acquired in the BGS acquisition. The Company intends
to design these solution suites to provide customers with a common look and feel
for all included products. There can be no assurance that these integration
efforts involving separate and distinct products, including those acquired from
BGS, will be successful. Also, given the recent announcement of this strategy,
the Company cannot predict its acceptance by customers.
With the acquisition of DataTools in May 1997 and BGS in March 1998, the
Company has initiated efforts to integrate the disparate cultures, employees,
systems and products. In both acquisitions, retention of key employees is
critical to ensure the continued advancement, development, support, sales and
marketing efforts pertaining to the acquired products. The Company has
implemented retention programs to keep many of the key technical, sales and
marketing employees. The Company has also elected to retain the principal
offices of both DataTools and BGS and has reorganized the management structure
at both of these locations. The Company has not historically managed
significant, fully staffed business units at locations different from the
Company's headquarters. As a result, the Company may experience additional
difficulties in integrating its management policies and practices into
DataTool's and BGS's operations. The Company has lost key employees that were
acquired in these acquisitions, especially at DataTools. The loss of the key
employees to date has not been detrimental to the Company's product integration
plans, although further losses could cause the product integrations to be
significantly delayed. Integration of DataTools SQL-BackTrack products is
critical to the completion of the Company's backup, recovery, and restoration
strategy. As noted above, integration of BGS's BEST/1 products with PATROL is
also critically important to the ASA Strategy. Successful integration of these
complex software products having different origins is difficult to predict and
achieve. There can be no assurance that these product integrations will meet
expectations or be successful.
Microsoft has continued its focus on developing operating systems, systems
management products and databases that will provide "business-critical" levels
of functionality and reliability. Specifically, Microsoft is aggressively
promoting its BackOffice family of software products, including its MS Windows
NT operating system and its SQL Server relational database management systems,
as lower cost alternatives to the Unix operating systems coupled with relational
database management systems from Oracle, Sybase, Informix and other vendors.
Microsoft has significantly lower software
19
20
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
price points in some of the Company's markets, which could place additional
pricing pressure on the Company. Further, Microsoft could choose to develop
competing products for use within MS Windows NT environments. The Company has
invested and intends to continue to invest in the development of systems
management products for MS Windows NT and BackOffice environments, but there are
numerous uncertainties associated with the Company's ability to successfully
execute this strategy.
Litigation seeking to enforce patents, copyrights and trade secrets is
increasing in the software industry. There can be no assurance that third
parties will not assert that their patent 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.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the Year 2000. Software failures due to processing errors
potentially arising from calculations using the Year 2000 date are a known risk.
The Company is designing and testing the most current versions of its products
to process Year 2000 data without interruption or errors and believes that these
versions are substantially Year 2000 compliant. The Company may experience
migration costs for customers who are not running current versions of its
products. The Company is continually testing its products to ensure Year 2000
support and compliance; there can be no assurance, however, that despite such
testing, undetected errors or defects will not exist that could cause a product
to fail to process Year 2000 data correctly. The Company's products are
typically used in high volume information systems that are critical to a
customer's operations, so that business interruptions, loss or corruption of
data or other major problems could have significant adverse consequences to the
customer. At this time, the Company is not aware of any material operational
issues or costs associated with Year 2000 compliance of its own products.
The Company is also addressing the Year 2000 risk to the availability,
integrity and the reliability of its own internal information systems. The
Company has a low volume of transactions and operates within a modern
infrastructure. Accordingly, the Company does not believe that the cost of Year
2000 remediation will have a material adverse effect on the Company's results of
operations or financial condition. There are no assurances, however, that there
will not be a delay in, or increased cost associated with, the implementation of
such changes, and the Company's inability to implement such changes could have
an adverse effect on future results of operations. Factors that could cause
unusual costs and delays include the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer code and
other uncertainties.
The European Union's adoption of the euro single currency raises a variety
of issues associated with the Company's European operations. Although the
transition will be phased in over several years, the euro will become Europe's
single currency on January 1, 1999. The Company is assessing euro issues related
to its product pricing, contracts, treasury operations and accounting systems.
Although the evaluation of these items is still in process, the Company believes
that the hardware and software systems it uses internally will accommodate this
transition and any required policy or operating changes will not have a material
adverse effect on future results.
20
21
BMC SOFTWARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
21
22
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: August 14, 1998 By:/S/ Max P. Watson Jr.
----------------- ---------------------
Max P. Watson Jr.
Chairman of the Board, President and
Chief Executive Officer
Date: August 14, 1998 By:/S/ William M. Austin
----------------- ---------------------
William M. Austin
Senior Vice President and
Chief Financial Officer
Date: August 14, 1998 By:/S/ Kevin M. Klausmeyer
----------------- -----------------------
Kevin M. Klausmeyer
Chief Accounting Officer
22
23
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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EX-27 Financial Data Schedule