It is important that this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) be read in conjunction with: (i) the attached unaudited condensed consolidated financial statements and notes thereto, (ii) the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2012, and (iii) our discussion of risks and uncertainties included within the section entitled Risk Factors in our Annual Report on Form 10-K for the year ended March 31, 2012.

This MD&A contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are identified by the use of the words "believe," "expect," "anticipate," "estimate," "will," "contemplate," "would" and similar expressions that contemplate future events. Such forward-looking statements are based on management's reasonable current assumptions and expectations. Numerous important factors, risks and uncertainties, including but not limited to those summarized under Risk Factors in our Annual Report on Form 10-K for the year ended March 31, 2012, affect our operating results and could cause our actual results, levels of activity, performance or achievement to differ materially from the results expressed or implied by these or any other forward-looking statements made by us or on our behalf. There can be no assurance that future results will meet expectations.

BMC, BMC Software and the BMC Software logo are the exclusive properties of BMC Software, Inc., are registered with the U.S. Patent and Trademark Office, and may be registered or pending registration in other countries. All other BMC trademarks, service marks and logos may be registered or pending registration in the U.S. or in other countries. All other trademarks or registered trademarks are the property of their respective owners.

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

A summary of select operating metrics for our first fiscal quarter ended June 30, 2012 is as follows:

• Total bookings, which represent the contract value of new transactions that we closed and recorded, were $470.3 million for the quarter, representing a decrease of $145.1 million, or 23.6%, from the prior year quarter. The prior year quarter included one large transaction that generated total bookings of over $100 million, principally related to our MSM business.

• Total license bookings were $127.9 million for the quarter, representing a decrease of $64.6 million, or 33.6%, from the prior year quarter. During the quarter, we closed 21 transactions with license bookings over $1 million (with total license bookings of $53.8 million) compared to 31 transactions with license bookings over $1 million (with total license bookings of $122.1 million) in the prior year quarter.

• Within our ESM-Solutions segment, where we evaluate performance on the basis of license bookings, total license bookings for the quarter decreased by $11.7 million, or 11.6%, from the prior year quarter. We attribute this decrease primarily to the impact of foreign currency exchange rate changes, a weakening global economic environment and internal sales-related factors. We estimate that foreign currency exchange rate changes contributed to an approximate $5 million, or 5%, reduction in ESM license bookings as compared to the prior year quarter, on a constant currency basis. We also saw evidence of the weakening economic environment in certain areas. Lastly, while sales force capacity reached planned levels during the quarter, we believe that overall productivity was negatively impacted by lower sales force tenure and experience levels, particularly in certain regions.

• Within our MSM segment, where we evaluate performance based on total and annualized bookings, total bookings for the trailing twelve months ended June 30, 2012 decreased by $214.7 million, or 21.7%, and on an annualized basis, after normalizing for contract length, decreased by $38.0 million, or 12.6%, as compared to the prior year period. These trailing twelve month decreases were attributable primarily to the large prior year transaction referred to above as well as the timing of other transaction renewal cycles. Over the trailing 36 months ended June 30, 2012, total MSM bookings increased by $82.5 million, or 3.3%, and on an annualized basis, after normalizing for contract length, increased by $21.8 million, or 2.7%, as compared to the prior year period.

• Total revenue for the quarter was $504.4 million, representing an increase of $2.0 million, or 0.4%, over the prior year quarter. The increase for the quarter was reflective of maintenance and professional services revenue increases of $14.2 million, or 5.4%, and $5.7 million, or 11.8%, respectively, partially offset by a license revenue decrease of $17.9 million, or 9.4%. On a segment basis, ESM-Solutions revenue for the quarter decreased by $6.1 million, or 2.3%, ESM-Services revenue increased by $5.7 million, or 11.8%, and MSM revenue increased by $2.4 million, or 1.2%, as compared to the prior year quarter. We estimate that foreign currency exchange rate fluctuations contributed to an approximate $9 million, or 2%, decrease in revenue as compared to the prior year quarter, on a constant currency basis.

• Operating income for the quarter was $73.9 million, representing a decrease of $41.2 million, or 35.8%, from the prior year quarter. Non-GAAP operating income for the quarter was $148.0 million, representing a decrease of $22.5 million, or 13.2%, from the prior year quarter.

• Net earnings for the quarter were $54.1 million, representing a decrease of $41.6 million, or 43.5%, from the prior year quarter. Non-GAAP net earnings for the quarter were $105.9 million, representing a decrease of $23.4 million, or 18.1%, from the prior year quarter.

• Diluted earnings per share for the quarter was $0.33, representing a decrease of $0.20 per share, or 37.7%, from the prior year quarter. Non-GAAP diluted earnings per share was $0.65, representing a decrease of $0.07 per share, or 9.7%, from the prior year quarter.

• Cash flows from operations for the quarter ended June 30, 2012 were $219.6 million, representing a decrease of $41.8 million, or 16.0%, from the prior year quarter. We closed out the quarter with a strong balance sheet at June 30, 2012, including $1.6 billion in cash, cash equivalents and investments and $2.0 billion in deferred revenue.

We continue to invest in our technology leadership, including in the areas of cloud computing and software-as-a-service (SaaS). In addition to our ongoing product development efforts, we consummated a strategic acquisition in our ESM segment during the quarter ended June 30, 2012, acquiring Abydos Limited, a provider of workflow management solutions, which enhances the user experience of our Remedy IT Service Management suite.

We also continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. During the quarter ended June 30, 2012, we repurchased 3.5 million shares for a total value of $150.0 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.

Results of Operations and Financial Condition

The following table sets forth, for the periods indicated, the percentages that
selected items in the condensed 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
                                                  Quarter Ended June 30,
                                             2012                        2011
Revenue:
License                                            34.0 %                      37.7 %
Maintenance                                        55.3 %                      52.7 %
Professional services                              10.7 %                       9.6 %
Total revenue                                     100.0 %                     100.0 %
Operating expenses:
Cost of license revenue                             7.8 %                       7.6 %
Cost of maintenance revenue                        10.1 %                       8.7 %
Cost of professional services revenue              11.4 %                       9.4 %
Selling and marketing expenses                     32.7 %                      28.8 %
Research and development expenses                   8.4 %                       8.9 %
General and administrative expenses                12.5 %                      11.7 %
Amortization of intangible assets                   2.5 %                       2.0 %
Total operating expenses                           85.3 %                      77.1 %
Operating income                                   14.7 %                      22.9 %
Other loss, net                                    (1.6 )%                     (0.3 )%
Earnings before income taxes                       13.0 %                      22.6 %
Provision for income taxes                          2.3 %                       3.5 %
Net earnings                                       10.7 %                      19.0 %

Revenue

The following table provides information regarding software license and software
maintenance revenue for the quarters ended June 30, 2012 and 2011:



                                         Quarter Ended June 30,
     Software License Revenue            2012              2011          % Change
                                              (In millions)
     Enterprise Service Management    $      97.1       $     118.5          (18.1 )%
     Mainframe Service Management            74.5              71.0            4.9 %

     Total software license revenue   $     171.6       $     189.5           (9.4 )%

                                           Quarter Ended June 30,
   Software Maintenance Revenue            2012              2011          % Change
                                                (In millions)
   Enterprise Service Management        $     156.5       $     141.2           10.8 %
   Mainframe Service Management               122.3             123.4           (0.9 )%

   Total software maintenance revenue   $     278.8       $     264.6            5.4 %

                                         Quarter Ended June 30,
      Total Software Revenue             2012              2011          % Change
                                              (In millions)
      Enterprise Service Management   $     253.6       $     259.7           (2.3 )%
      Mainframe Service Management          196.8             194.4            1.2 %

      Total software revenue          $     450.4       $     454.1           (0.8 )%

Software License Revenue

License revenue for the quarter ended June 30, 2012 was $171.6 million, a decrease of $17.9 million, or 9.4%, from the prior year quarter. This decrease was attributable to a decrease in ESM license revenue, partially offset by an increase in MSM license revenue, as further discussed below. Recognition of license revenue that was deferred in prior periods decreased $9.8 million for the quarter ended June 30, 2012 as compared to the prior year quarter. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront was 58% in the current quarter as compared to 45% in the prior year quarter.

ESM license revenue was $97.1 million, or 56.6%, and $118.5 million, or 62.5%, of our total license revenue for the quarters ended June 30, 2012 and 2011, respectively. ESM license revenue for the quarter ended June 30, 2012 decreased by $21.4 million, or 18.1%, from the prior year quarter, due to a $12.2 million decrease in the recognition of previously deferred license revenue and a $9.2 million reduction in upfront license revenue recognized in connection with new transactions. The decrease in upfront license revenue recognized in the quarter ended June 30, 2012 was attributable to a decrease in license bookings along with a lower percentage of such bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms.

MSM license revenue was $74.5 million, or 43.4%, and $71.0 million, or 37.5%, of our total license revenue for the quarters ended June 30, 2012 and 2011, respectively. MSM license revenue for the quarter ended June 30, 2012 increased by $3.5 million, or 4.9%, over the prior year quarter. This increase was due to a $2.4 million increase in the recognition of previously deferred license revenue and a $1.1 million increase in the amount of upfront license revenue recognized in connection with new transactions. The increase in upfront license revenue recognized in the quarter ended June 30, 2012 was attributable to a higher percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms, partially offset by a decrease in license bookings.

Deferred License Revenue

For the quarters ended June 30, 2012 and 2011, our recognized license revenue
was impacted by the changes in our deferred license revenue balance as follows:



                                                          Quarter Ended June 30,
                                                           2012             2011
                                                               (In millions)
  Deferrals of license revenue                          $     53.5        $   106.1
  Recognition from deferred license revenue                  (94.5 )         (104.3 )
  Impact of foreign currency exchange rate changes            (2.7 )            1.2

  Net increase (decrease) in deferred license revenue   $    (43.7 )      $     3.0

  Deferred license revenue balance at end of period     $    647.0        $   689.1

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 June 30 2012, the deferred license revenue balance was $647.0 million. Estimated future recognition from deferred license revenue at June 30, 2012 is (in millions):

                       Remainder of fiscal 2013     $ 255.7
                       Fiscal 2014                    202.2
                       Fiscal 2015 and thereafter     189.1

                                                    $ 647.0

Software Maintenance Revenue

Maintenance revenue for the quarter ended June 30, 2012 was $278.8 million, an increase of $14.2 million, or 5.4%, over the prior year quarter, due to an increase in ESM maintenance revenue, partially offset by a decrease in MSM maintenance revenue, as discussed below. Maintenance revenue included revenue from our SaaS offerings, which is included in our ESM segment, of $5.6 million and $1.1 million for the quarters ended June 30, 2012 and 2011, respectively.

ESM maintenance revenue was $156.5 million, or 56.1%, and $141.2 million, or 53.4%, of our total maintenance revenue for the quarters ended June 30, 2012 and 2011, respectively. ESM maintenance revenue for the quarter ended June 30, 2012 increased by $15.3 million, or 10.8%, over the prior year quarter. This increase was attributable primarily to an expanded installed ESM customer license base.

MSM maintenance revenue was $122.3 million, or 43.9%, and $123.4 million, or 46.6%, of our total maintenance revenue for the quarters ended June 30, 2012 and 2011, respectively. MSM maintenance revenue for the quarter ended June 30, 2012 decreased by $1.1 million, or 0.9%, from the prior year quarter.

Deferred Maintenance Revenue

At June 30, 2012, the deferred maintenance revenue balance was $1.3 billion.
Estimated future recognition from deferred maintenance revenue at June 30, 2012
is (in millions):



                      Remainder of fiscal 2013     $   601.7
                      Fiscal 2014                      366.8
                      Fiscal 2015 and thereafter       305.4

                                                   $ 1,273.9

Domestic vs. International Revenue



                                            Quarter Ended June 30,
                                            2012              2011          % Change
                                                 (In millions)
   License:
   Domestic                              $      77.7       $      85.3           (8.9 )%
   International                                93.9             104.2           (9.9 )%

   Total license revenue                       171.6             189.5           (9.4 )%

   Maintenance:
   Domestic                                    154.4             141.6            9.0 %
   International                               124.4             123.0            1.1 %

   Total maintenance revenue                   278.8             264.6            5.4 %

   Professional services:
   Domestic                                     24.4              21.8           11.9 %
   International                                29.6              26.5           11.7 %

   Total professional services revenue          54.0              48.3           11.8 %

   Total domestic revenue                      256.5             248.7            3.1 %
   Total international revenue                 247.9             253.7           (2.3 )%

   Total revenue                         $     504.4       $     502.4            0.4 %

We estimate that foreign currency exchange rate fluctuations contributed to an approximate $9 million decrease in our international revenue for the quarter ended June 30, 2012 as compared to the prior year quarter, on a constant currency basis.

Domestic License Revenue

Domestic license revenue was $77.7 million, or 45.3%, and $85.3 million, or 45.0%, of our total license revenue for the quarters ended June 30, 2012 and 2011, respectively. Domestic license revenue for the quarter ended June 30, 2012 decreased by $7.6 million, or 8.9%, from the prior year quarter, due to a $9.7 million decrease in ESM license revenue, partially offset by a $2.1 million increase in MSM license revenue.

International License Revenue

International license revenue was $93.9 million, or 54.7%, and $104.2 million, or 55.0%, of our total license revenue for the quarters ended June 30, 2012 and 2011, respectively.

International license revenue for the quarter ended June 30, 2012 decreased by $10.3 million, or 9.9%, from the prior year quarter, due to an $11.7 million decrease in ESM license revenue, partially offset by a $1.4 million increase in MSM license revenue. The ESM license revenue decrease was attributable primarily to decreases of $6.5 million, $3.0 million and $2.7 million in our Europe, Middle East and Africa (EMEA), Latin America and Asia Pacific markets, respectively. The MSM license revenue increase was attributable primarily to increases of $2.0 million and $1.0 million in our Asia Pacific and Latin America markets, respectively, partially offset by a $1.5 million decrease in our EMEA market.

Domestic Maintenance Revenue

Domestic maintenance revenue was $154.4 million, or 55.4%, and $141.6 million, or 53.5%, of our total maintenance revenue for the quarters ended June 30, 2012 and 2011, respectively. Domestic maintenance revenue for the quarter ended June 30, 2012 increased by $12.8 million, or 9.0%, over the prior year quarter, due to an $11.5 million increase in ESM maintenance revenue and a $1.3 million increase in MSM maintenance revenue.

International Maintenance Revenue

International maintenance revenue was $124.4 million, or 44.6%, and $123.0 million, or 46.5%, of our total maintenance revenue for the quarters ended June 30, 2012 and 2011, respectively.

International maintenance revenue for the quarter ended June 30, 2012 increased by $1.4 million, or 1.1%, over the prior year quarter, due to a $3.9 million increase in ESM maintenance revenue, partially offset by a $2.5 million decrease in MSM maintenance revenue. The ESM maintenance revenue increase was attributable primarily to an increase of $1.9 million in each of our EMEA and Asia Pacific markets. The MSM maintenance revenue decrease was attributable primarily to decreases of $1.6 million and $1.3 million in our Latin America and EMEA markets, respectively.

Professional Services Revenue

Professional services revenue for the quarter ended June 30, 2012 increased by $5.7 million, or 11.8%, over the prior year quarter, which is reflective of a $2.6 million, or 11.9%, increase in domestic professional services revenue and a $3.1 million, or 11.7%, increase in international professional services revenue. These increases were attributable primarily to increases in implementation and consulting services revenue period over period, including increased demand for cloud implementations.

Operating Expenses



                                             Quarter Ended June 30,
                                             2012              2011          % Change
                                                  (In millions)
  Cost of license revenue                 $      39.2       $      38.3            2.3 %
  Cost of maintenance revenue                    50.9              43.8           16.2 %
  Cost of professional services revenue          57.7              47.4           21.7 %
  Selling and marketing expenses                164.9             144.7           14.0 %
  Research and development expenses              42.2              44.7           (5.6 )%
  General and administrative expenses            63.0              58.6            7.5 %
  Amortization of intangible assets              12.6               9.8           28.6 %

  Total operating expenses                $     430.5       $     387.3           11.2 %

We estimate that foreign currency exchange rate fluctuations contributed to an approximate $13 million decrease in our international operating expenses for the quarter ended June 30, 2012 as compared to the prior year quarter, on a constant currency basis.

Cost of License Revenue

Cost of license revenue consists primarily of the amortization of capitalized software costs for internally developed products, the amortization of acquired technology for products acquired through business combinations, license-based royalties to third parties and production and distribution costs for initial product licenses. For the quarters ended June 30, 2012 and 2011, cost of license revenue was $39.2 million, or 7.8%, and $38.3 million, or 7.6%, of total revenue, respectively, and 22.8% and 20.2% of license revenue, respectively.

Cost of license revenue for the quarter ended June 30, 2012 increased by $0.9 million, or 2.3%, over the prior year quarter. This increase was attributable primarily to a $1.5 million increase in the amortization of . . .