It is important that this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Risk Factors and elsewhere in this Annual Report on Form 10-K.

Unless indicated otherwise, results of operations data in this MD&A are presented in accordance with United States generally accepted accounting principles (GAAP). Additionally, in an effort to provide investors with additional information regarding our results of operations, certain non-GAAP financial measures including non-GAAP operating income, non-GAAP net earnings and non-GAAP diluted earnings per share are provided in this MD&A. See Non-GAAP Financial Measures and Reconciliations below for an explanation of our use of non-GAAP financial measures and reconciliations to their corresponding measures calculated in accordance with GAAP.

Overview

Our fiscal 2012 financial performance was solid across most of our core financial metrics. However, year over year ESM license bookings declined and were below our original expectations; refer to the additional discussion regarding ESM license bookings below. Select operating metrics for fiscal 2012 include:

• Total bookings, which represent the contract value of transactions closed and recorded, were $2,196.8 million, essentially flat as compared to fiscal 2011. During fiscal 2012, one large transaction generated total bookings of over $100 million, principally related to our MSM business.

• Total license bookings were $882.4 million, representing a decrease of $44.0 million, or 4.7%, from fiscal 2011. During fiscal 2012, we closed 158 transactions with license values over $1 million (with total license bookings of $480.0 million) compared with 162 transactions with license values over $1 million (with total license bookings of $498.1 million) in fiscal 2011.

• Within our ESM segment, where we evaluate performance on the basis of license bookings, total license bookings decreased by $64.7 million, or 11.3%, from fiscal 2011. We attribute this decrease principally to sales-related factors, including a decline in productive sales capacity caused by sales force attrition as well as a decrease in productivity associated with a reduction in average sales force tenure and experience levels. ESM license bookings in the current year have also been adversely impacted by challenging economic and financial conditions in key geographic areas and market segments, particularly within certain European regions and the U.S. public sector.

• Within our MSM segment, where we evaluate performance based on total and annualized bookings, total bookings for the trailing twelve months ended March 31, 2012 increased by $51.9 million, or 6.2%, and on an annualized basis, after normalizing for contract length, decreased by $27.0 million, or 9.3%, as compared to the prior year period. Over the trailing 36 months ended March 31, 2012, total MSM bookings increased by $156.7 million, or 6.5%, and annualized bookings, after normalizing for contract length, were essentially flat as compared to the prior year period.

• Total revenue was $2,172.0 million, representing an increase of $106.7 million, or 5.2%, over fiscal 2011. This increase was reflective of license, maintenance and professional services revenue increases of $13.3 million, or 1.5%, $56.2 million, or 5.5%, and $37.2 million, or 21.1%, respectively. On a segment basis, total ESM revenue increased by $63.1 million, or 4.9%, and total MSM revenue increased by $43.6 million, or 5.5%, over fiscal 2011.

• Operating income was $543.9 million, representing an increase of $11.1 million, or 2.1%, over fiscal 2011. Non-GAAP operating income was $779.6 million, representing an increase of $46.9 million, or 6.4%, over fiscal 2011.

• Net earnings were $401.0 million, representing a decrease of $55.2 million, or 12.1%, from fiscal 2011. Included in net earnings for fiscal 2012 and 2011 were net tax benefits of $6.2 million and $57.2 million, respectively, associated with tax authority settlements related to prior years' tax matters which were excluded from our non-GAAP results. Non-GAAP net earnings were $562.1 million, representing an increase of $15.9 million, or 2.9%, over fiscal 2011.

• Diluted earnings per share was $2.32, representing a decrease of $0.18, or 7.2%, from fiscal 2011. Included in diluted earnings per share for fiscal 2012 and 2011 were net tax benefits of $0.04 and $0.31 per share, respectively, associated with tax authority settlements related to prior years' tax matters which were excluded from our non-GAAP results. Non-GAAP diluted earnings per share was $3.25, representing an increase of $0.26, or 8.7%, over fiscal 2011.

We continue to invest in our technology leadership, including in the areas of cloud computing and SaaS. In addition to our ongoing product development efforts, we consummated multiple strategic acquisitions across both our ESM and MSM segments during fiscal 2012 for aggregate cash consideration of $474.0 million. In our ESM segment, we acquired Coradiant Inc., Aeroprise, Inc., StreamStep, Inc. and Numara Software Holdings, Inc., the latter of which we recently acquired in the fourth quarter and which expands our IT service management solution offerings to small and mid-sized businesses. In our MSM segment, we completed the purchase of Neon Enterprise Software, LLC's IMS software portfolio and I/O Concepts Software Corporation.

We also continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. During fiscal 2012, we repurchased approximately 19.2 million shares for a total value of $780.5 million.

Our earnings are subject to volatility as a significant portion of our operating expenses is fixed in the short-term and we plan a portion of our expense run-rate based on our expectations of future revenue. In addition, a significant amount of our license transactions are completed during the final weeks and days of each quarter, and therefore, we generally do not know whether revenue has met our expectations until after the end of the quarter. If a shortfall in revenue were to occur in any given quarter, there would be an immediate, and possibly significant, impact to our overall earnings and, most likely, our stock price.

Because our software solutions are designed for and marketed to companies looking to improve the management of their IT infrastructure and processes, demand for our products, and therefore our financial results, are dependent upon customers continuing to value such solutions and to invest in such technology. There are a number of trends that have historically influenced demand for IT management software, including, among others, business demands placed on IT, computing capacity within IT departments, complexity of IT systems and IT operational costs. Our financial results are also influenced by many economic and industry conditions, including, but not limited to, general economic and market conditions in the United States and other economies in which we market products, changes in foreign currency exchange rates, general levels of customer spending, IT budgets, the competitiveness of the IT management software and solutions industry, the adoption rate for Business Service Management and the stability of the mainframe market.

Acquisitions

We have consummated multiple acquisitions of businesses in recent years. Each of these acquisitions has been accounted for using the acquisition method of accounting. Accordingly, the financial results for these entities have been included in our consolidated financial results since the applicable acquisition dates.

Fiscal 2012 Acquisitions

During fiscal 2012, we completed the acquisitions of Numara Software Holdings, Inc., a provider of integrated IT service management solutions for mid-sized and small companies, for total cash consideration of $305.9 million, and Coradiant Inc., a global provider of end-to-end performance management of web applications, for total cash consideration of $130.0 million. Additionally, we completed the acquisitions of Aeroprise, Inc., a provider of mobile IT service management solutions, Neon Enterprise Software, LLC's IMS software portfolio, StreamStep, Inc., a provider of application release process management solutions, and I/O Concepts Software Corporation, a provider of mainframe management and security solutions, for combined cash consideration of $38.1 million.

Fiscal 2011 Acquisitions

During fiscal 2011, we completed the acquisition of the software business of Neptuny S.r.l., a provider of continuous capacity optimization software, and the acquisition of GridApp Systems, Inc., a provider of comprehensive database provisioning, patching and administration software, for combined purchase consideration of $51.5 million.

Fiscal 2010 Acquisitions

During fiscal 2010, we completed the acquisitions of MQSoftware, Inc., a provider of middleware and enterprise application transaction management software, Tideway Systems Limited, a provider of IT discovery solutions, and Phurnace Software, Inc., a developer of software that automates the deployment and configuration of business-critical Java™ EE applications, for combined purchase consideration of $94.3 million.

Historical performance should not be viewed as indicative of future performance, as there can be no assurance that operating income or net earnings will be sustained at these levels. For a discussion of factors affecting operating results, see the Risk Factors section above.

Results of Operations

The following table sets forth, for the fiscal years indicated, the percentages that selected items in the accompanying consolidated statements of comprehensive income represent of total revenue. These financial results are not necessarily indicative of future results.

                                                  Percentage of Total Revenue
                                                 for the Year Ended March  31,
                                               2012            2011          2010
     Revenue:
     License                                      40.4 %         41.8 %        39.6 %
     Maintenance                                  49.8 %         49.6 %        53.6 %
     Professional services                         9.8 %          8.6 %         6.8 %
     Total revenue                               100.0 %        100.0 %       100.0 %
     Operating expenses:
     Cost of license revenue                       7.3 %          6.3 %         6.0 %
     Cost of maintenance revenue                   9.1 %          8.2 %         8.3 %
     Cost of professional services revenue         9.8 %          9.0 %         7.2 %
     Selling and marketing expenses               29.2 %         29.6 %        29.2 %
     Research and development expenses             7.6 %          8.8 %        10.3 %
     General and administrative expenses          10.0 %         10.7 %        10.8 %
     Amortization of intangible assets             1.9 %          1.6 %         1.7 %
     Total operating expenses                     75.0 %         74.2 %        73.5 %
     Operating income                             25.0 %         25.8 %        26.5 %
     Other loss, net                              (0.6 )%        (0.1 )%       (0.1 )%
     Earnings before income taxes                 24.4 %         25.7 %        26.4 %
     Provision for income taxes                    5.9 %          3.6 %         5.1 %
     Net earnings                                 18.5 %         22.1 %        21.2 %

Revenue

The following table provides information regarding software license and software
maintenance revenue for fiscal 2012, 2011 and 2010.



                                                                                                           Percentage Change
                                                                                                      2012                   2011
                                                        Year Ended March 31,                      Compared to             Compared to
Software License Revenue                     2012               2011               2010               2011                   2010
                                                            (In millions)
Enterprise Service Management              $   543.3       $         550.9       $   462.2                 (1.4 )%                19.2 %
Mainframe Service Management                   334.5                 313.6           296.2                  6.7 %                  5.9 %

Total software license revenue             $   877.8       $         864.5       $   758.4                  1.5 %                 14.0 %


                                                                                                           Percentage Change
                                                                                                      2012                   2011
                                                        Year Ended March 31,                      Compared to             Compared to
Software Maintenance Revenue                 2012               2011               2010               2011                   2010
                                                            (In millions)
Enterprise Service Management              $   585.0       $         551.5       $   550.9                  6.1 %                  0.1 %
Mainframe Service Management                   495.4                 472.7           472.8                  4.8 %                 (0.0 )%

Total software maintenance revenue         $ 1,080.4       $       1,024.2       $ 1,023.7                  5.5 %                  0.0 %

                                                                                                       Percentage Change
                                                                                                  2012                   2011
                                                    Year Ended March 31,                      Compared to             Compared to
Total Software Revenue                   2012               2011               2010               2011                   2010
                                                        (In millions)
Enterprise Service Management          $ 1,128.3       $       1,102.4       $ 1,013.1                  2.3 %                  8.8 %
Mainframe Service Management               829.9                 786.3           769.0                  5.5 %                  2.2 %

Total software revenue                 $ 1,958.2       $       1,888.7       $ 1,782.1                  3.7 %                  6.0 %

Software License Revenue

License revenue was $877.8 million, $864.5 million and $758.4 million for fiscal 2012, 2011 and 2010, respectively.

License revenue in fiscal 2012 increased by $13.3 million, or 1.5%, over fiscal 2011. This increase was attributable to a license revenue increase in our MSM segment, partially offset by a license revenue decrease in our ESM segment, as further discussed below. Recognition of license revenue in fiscal 2012 that was deferred in prior periods increased by $9.7 million over fiscal 2011. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront increased to 54% for fiscal 2012 as compared to 51% in fiscal 2011.

License revenue in fiscal 2011 increased by $106.1 million, or 14.0%, over fiscal 2010. This increase was attributable to license revenue increases in both our ESM and MSM segments, as further discussed below. Recognition of license revenue in fiscal 2011 that was deferred in prior periods increased by $4.3 million over fiscal 2010. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront increased to 51% for fiscal 2011 as compared to 48% in fiscal 2010.

ESM license revenue was $543.3 million, or 61.9%, $550.9 million, or 63.7%, and $462.2 million, or 60.9%, of our total license revenue for fiscal 2012, 2011 and 2010, respectively. ESM license revenue in fiscal 2012 decreased by $7.6 million, or 1.4%, from fiscal 2011, due to a $13.4 million decrease in the recognition of previously deferred license revenue, partially offset by a $5.8 million increase in the amount of upfront license revenue recognized in connection with new transactions. ESM license revenue in fiscal 2011 increased by $88.7 million, or 19.2%, over fiscal 2010, primarily due to a $77.9 million increase in the amount of upfront license revenue recognized in connection with new transactions and a $10.8 million increase in the recognition of previously deferred license revenue. The increase in upfront license revenue recognized was attributable to an increase in ESM license transaction bookings, due primarily to increased demand for our BSM solutions and increased sales productivity, and a higher percentage of license transaction bookings that were recognized as upfront revenue rather than ratably over the underlying contractual maintenance terms.

For fiscal 2012, 2011 and 2010, our recognized license revenue was impacted by the changes in our deferred license revenue balance as follows:

                                                                 Year Ended March 31,
                                                        2012             2011             2010
                                                                     (In millions)
Deferrals of license revenue                          $   410.4        $   454.1        $   398.9
Recognition from deferred license revenue                (404.5 )         (394.8 )         (390.5 )
Impact of foreign currency exchange rate changes           (1.3 )            2.6              4.9

Net increase in deferred license revenue              $     4.6        $    61.9        $    13.3

Deferred license revenue balance at end of period     $   690.7        $   686.1        $   624.2

The primary reasons for license revenue deferrals include, but are not limited to, customer transactions that include products for which the maintenance pricing is based on a combination of undiscounted license list prices, net license fees or discounted license list prices, certain arrangements that include unlimited licensing rights, time-based licenses that are recognized over the term of the arrangement, customer transactions that include products with differing maintenance periods and other transactions for which we do not have or are not able to determine vendor-specific objective evidence of the fair value of the maintenance and/or professional services. The contract terms and conditions that result in deferral of revenue recognition for a given transaction result from arm's length negotiations between us and our customers. We anticipate our transactions will continue to include such contract terms that result in deferral of the related license revenue as we expand our offerings to meet customers' product, pricing and licensing needs.

Once it is determined that license revenue for a particular contract must be deferred, based on the contractual terms and application of revenue recognition policies to those terms, we recognize such license revenue either ratably over the term of the contract or when the revenue recognition criteria are met. Because of this, we generally know the timing of the subsequent recognition of license revenue at the time of deferral. Therefore, the amount of license revenue to be recognized from the deferred revenue balance in each future quarter is generally predictable. At March 31, 2012, the deferred license revenue balance was $690.7 million. Estimated future recognition from deferred license revenue at March 31, 2012 is (in millions):

                      Fiscal 2013                  $  328.0
                      Fiscal 2014                     185.4
                      Fiscal 2015 and thereafter      177.3

                                                   $  690.7

Software Maintenance Revenue

Maintenance revenue was $1,080.4 million, $1,024.2 million and $1,023.7 million for fiscal 2012, 2011 and 2010, respectively. Maintenance revenue for fiscal 2012 included $9.7 million of revenue from our SaaS offerings, which is included in our ESM segment.

Maintenance revenue in fiscal 2012 increased by $56.2 million, or 5.5% over fiscal 2011. This increase was attributable to maintenance revenue increases in both our ESM and MSM segments, as further discussed below.

ESM maintenance revenue was $585.0 million, or 54.1%, $551.5 million, or 53.8%, and $550.9 million, or 53.8%, of our total maintenance revenue for fiscal 2012, 2011 and 2010, respectively. ESM maintenance revenue in fiscal 2012 increased by $33.5 million, or 6.1%, over fiscal 2011. This year over year increase was attributable primarily to the expansion of our installed ESM customer license base and a $9.2 million increase in SaaS subscription revenue. ESM maintenance revenue remained relatively flat in fiscal 2011 as compared to fiscal 2010.

MSM maintenance revenue was $495.4 million, or 45.9%, $472.7 million, or 46.2%, and $472.8 million, or 46.2%, of our total maintenance revenue for fiscal 2012, 2011 and 2010, respectively. MSM maintenance revenue in fiscal 2012 increased by $22.7 million, or 4.8%, over fiscal 2011, due to the expansion of our installed MSM customer license base and increasing capacities of the current installed base. MSM maintenance revenue remained relatively flat in fiscal 2011 as compared to fiscal 2010.

At March 31, 2012, the deferred maintenance revenue balance was $1,267.2 million. Estimated future recognition from deferred maintenance revenue at March 31, 2012 is (in millions):

                     Fiscal 2013                  $    699.1
                     Fiscal 2014                       313.2
                     Fiscal 2015 and thereafter        254.9

                                                  $  1,267.2

Domestic vs. International Revenue



                                                                                                  Percentage Change
                                                                                             2012                   2011
                                               Year Ended March 31,                      Compared to             Compared to
                                    2012               2011               2010               2011                   2010
                                                   (In millions)
License:
Domestic                          $   412.5       $         420.4       $   390.3                 (1.9 )%                 7.7 %
International                         465.3                 444.1           368.1                  4.8 %                 20.6 %

Total license revenue                 877.8                 864.5           758.4                  1.5 %                 14.0 %

Maintenance:
Domestic                              581.7                 556.8           561.4                  4.5 %                 (0.8 )%
International                         498.7                 467.4           462.3                  6.7 %                  1.1 %

Total maintenance revenue           1,080.4               1,024.2         1,023.7                  5.5 %                  0.0 %

Professional services:
Domestic                              103.6                  85.9            59.8                 20.6 %                 43.6 %
International                         110.2                  90.7            69.3                 21.5 %                 30.9 %

Total professional services
revenue                               213.8                 176.6           129.1                 21.1 %                 36.8 %

Total domestic revenue              1,097.8               1,063.1         1,011.5                  3.3 %                  5.1 %
Total international revenue         1,074.2               1,002.2           899.7                  7.2 %                 11.4 %

Total revenue                     $ 2,172.0       $       2,065.3       $ 1,911.2                  5.2 %                  8.1 %

We estimate that the effect of foreign currency exchange rate fluctuations on our international revenue resulted in an approximate $11 million increase in total fiscal 2012 revenue as compared to fiscal 2011 and an approximate $4 million increase in total fiscal 2011 revenue as compared to fiscal 2010, on a constant currency basis.

Domestic License Revenue

Domestic license revenue was $412.5 million, or 47.0%, $420.4 million, or 48.6%, and $390.3 million, or 51.5%, of our total license revenue for fiscal 2012, 2011 and 2010, respectively.

Domestic license revenue in fiscal 2012 decreased by $7.9 million, or 1.9%, from fiscal 2011, due to a $9.2 million decrease in ESM license revenue, partially offset by a $1.3 million increase in MSM license revenue.

International License Revenue

International license revenue was $465.3 million, or 53.0%, $444.1 million, or 51.4%, and $368.1 million, or 48.5%, of our total license revenue for fiscal 2012, 2011 and 2010, respectively.

. . .