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BMC > SEC Filings for BMC > Form 10-Q on 1-Nov-2012All Recent SEC Filings

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Form 10-Q for BMC SOFTWARE INC


1-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 (the Exchange Act), 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.


Table of Contents

Overview

A summary of select operating metrics for the quarter and six months ended September 30, 2012 is as follows:

Total bookings, which represent the contract value of new transactions that we closed and recorded, were $430.4 million for the quarter, representing an increase of $48.0 million, or 12.6%, over the prior year quarter, and for the first half of fiscal 2013 were $900.7 million, representing a decrease of $97.1 million, or 9.7%, from the prior year period. Within the first half of the prior fiscal year, one large transaction generated total bookings of over $100 million, principally related to our MSM business.

Total license bookings were $187.8 million for the quarter, representing an increase of $0.3 million, or 0.1%, over the prior year quarter, and for the first half of fiscal 2013 were $315.7 million, representing a decrease of $64.3 million, or 16.9%, from the prior year period. During the quarter, we closed 34 transactions with license bookings over $1 million (with total license bookings of $93.3 million) compared to 37 transactions with license bookings over $1 million (with total license bookings of $96.4 million) in the prior year quarter. During the first half of fiscal 2013, we closed 55 transactions with license bookings over $1 million (with total license bookings of $147.1 million) compared to 68 transactions with license bookings over $1 million (with total license bookings of $218.5 million) in the prior year period.

Within our ESM-Solutions segment, where we evaluate performance on the basis of license bookings, total license bookings for the quarter increased by $2.6 million, or 2.1%, over the prior year quarter, and for the first half of fiscal 2013 decreased by $9.1 million, or 4.0%, from the prior year period. We attribute this first half 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 for the quarter had a minimal impact on ESM license bookings as compared to the prior year quarter and for the first half of fiscal 2013 contributed to an approximate $5 million, or 2%, reduction in ESM license bookings as compared to the prior year period, on a constant currency basis. We also saw evidence of the weakening economic environment in certain areas. Lastly, while sales force capacity has reached planned levels, we believe that overall productivity for the first half of fiscal 2013 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 September 30, 2012 decreased by $146.9 million, or 15.6%, and on an annualized basis, after normalizing for contract length, decreased by $22.9 million, or 7.9%, 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 September 30, 2012, total MSM bookings increased by $54.9 million, or 2.3%, and on an annualized basis, after normalizing for contract length, increased by $18.3 million, or 2.3%, as compared to the prior year period.

Total revenue for the quarter was $548.2 million, representing a decrease of $8.5 million, or 1.5%, from the prior year quarter, and for the first half of fiscal 2013 was $1,052.6 million, representing a decrease of $6.5 million, or 0.6%, from the prior year period. The decrease for the quarter was reflective of decreases of $20.5 million, or 8.9%, and $2.9 million, or 5.1%, in license and professional services revenue, respectively, partially offset by a maintenance revenue increase of $14.9 million, or 5.5%. The decrease for the first half of fiscal 2013 was reflective of a decrease of $38.4 million, or 9.2%, in license revenue, partially offset by increases of $29.1 million, or 5.4%, and $2.8 million, or 2.7%, in maintenance and professional services revenue, respectively. On a segment basis, ESM-Solutions revenue for the quarter decreased by $0.7 million, or 0.2%, ESM-Services revenue decreased by $2.9 million, or 5.1%, and MSM revenue decreased by $4.9 million, or 2.3%, as compared to the prior year quarter. For the first half of fiscal 2013, ESM-Solutions revenue decreased by $6.8 million, or 1.2%, ESM-Services revenue decreased by $2.8 million, or 2.7%, and MSM revenue decreased by $2.5 million, or 0.6%, from the prior year period. We estimate that foreign currency exchange rate fluctuations contributed to an approximate $7 million, or 1%, decrease in revenue for the quarter, and an approximate $17 million, or 2%, decrease in revenue for the first half of fiscal 2013, as compared to the respective prior year periods, on a constant currency basis.


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Operating income for the quarter was $138.0 million, representing a decrease of $23.0 million, or 14.3%, from the prior year quarter, and for the first half of fiscal 2013 was $211.9 million, representing a decrease of $64.2 million, or 23.3%, from the prior year period. Non-GAAP operating income for the quarter was $198.4 million, representing a decrease of $18.0 million, or 8.3%, from the prior year quarter, and for the first half of fiscal 2013 was $346.4 million, representing a decrease of $40.5 million, or 10.5%, from the prior year period.

Net earnings for the quarter were $97.8 million, representing a decrease of $16.9 million, or 14.7%, from the prior year quarter, and for the first half of fiscal 2013 were $152.0 million, representing a decrease of $58.4 million, or 27.8%, from the prior year period. Non-GAAP net earnings for the quarter were $140.8 million, representing a decrease of $12.6 million, or 8.2%, from the prior year quarter, and for the first half of fiscal 2013 were $246.7 million, representing a decrease of $36.0 million, or 12.7%, from the prior year period.

Diluted earnings per share for the quarter was $0.61, representing a decrease of $0.04 per share, or 6.2%, from the prior year quarter, and for the first half of fiscal 2013 was $0.94, representing a decrease of $0.24 per share, or 20.3%, from the prior year period. Non-GAAP diluted earnings per share was $0.88, representing an increase of $0.01 per share, or 1.1%, over the prior year quarter, and for the first half of fiscal 2013 was $1.52, representing a decrease of $0.07 per share, or 4.4%, from the prior year period.

Cash flows from operations for the six months ended September 30, 2012 were $286.1 million, representing a decrease of $137.0 million, or 32.4%, from the prior year period. We closed out the quarter with a strong balance sheet at September 30, 2012, including $1.5 billion in cash, cash equivalents and investments and $1.8 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 three strategic acquisitions in our ESM segment during the six months ended September 30, 2012, acquiring Abydos Limited, a provider of workflow management solutions, VaraLogix, Inc., an application release automation provider, and my-eService, Inc., a provider of self-service IT support solutions.

We also continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. During the six months ended September 30, 2012, we repurchased 8.3 million shares for a total value of $350.0 million. In October 2012, our Board of Directors approved a new $1 billion stock repurchase program. We expect $750 million of the repurchase to be executed via an accelerated share repurchase agreement to be entered into during the quarter ending December 31, 2012.

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.


Table of Contents

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
                                             Quarter Ended             Six Months Ended
                                             September 30,               September 30,
                                          2012          2011          2012          2011
 Revenue:
 License                                    38.2 %        41.3 %        36.2 %        39.6 %
 Maintenance                                52.1 %        48.6 %        53.6 %        50.5 %
 Professional services                       9.8 %        10.1 %        10.2 %         9.9 %
 Total revenue                             100.0 %       100.0 %       100.0 %       100.0 %
 Operating expenses:
 Cost of license revenue                     7.4 %         7.1 %         7.6 %         7.3 %
 Cost of maintenance revenue                 9.7 %         8.9 %         9.9 %         8.8 %
 Cost of professional services revenue       9.9 %         9.6 %        10.7 %         9.5 %
 Selling and marketing expenses             29.8 %        27.6 %        31.1 %        28.2 %
 Research and development expenses           5.9 %         6.9 %         7.1 %         7.8 %
 General and administrative expenses        10.2 %         9.2 %        11.3 %        10.3 %
 Amortization of intangible assets           2.0 %         2.0 %         2.2 %         2.0 %
 Total operating expenses                   74.8 %        71.1 %        79.9 %        73.9 %
 Operating income                           25.2 %        28.9 %        20.1 %        26.1 %
 Other loss, net                            (1.2 )%       (0.9 )%       (1.4 )%       (0.6 )%
 Earnings before income taxes               24.0 %        28.1 %        18.7 %        25.5 %
 Provision for income taxes                  6.2 %         7.5 %         4.3 %         5.6 %
 Net earnings                               17.8 %        20.6 %        14.4 %        19.9 %


Table of Contents

Revenue

The following tables provide information regarding software license and software
maintenance revenue for the quarters and six months ended September 30, 2012 and
2011:



                                                Quarter Ended                           Six Months Ended
                                                September 30,                             September 30,
Software License Revenue                      2012        2011        % Change          2012         2011        % Change
                                                (In millions)                             (In millions)
Enterprise Service Management                $ 129.0     $ 146.0          (11.6 )%    $   226.1     $ 264.5          (14.5 )%
Mainframe Service Management                    80.2        83.7           (4.2 )%        154.7       154.7             -

Total software license revenue               $ 209.2     $ 229.7           (8.9 )%    $   380.8     $ 419.2           (9.2 )%


                                                Quarter Ended                           Six Months Ended
                                                September 30,                             September 30,
Software Maintenance Revenue                  2012        2011        % Change          2012         2011        % Change
                                                (In millions)                             (In millions)
Enterprise Service Management                $ 161.9     $ 145.6           11.2 %     $   318.4     $ 286.8           11.0 %
Mainframe Service Management                   123.5       124.9           (1.1 )%        245.8       248.3           (1.0 )%

Total software maintenance revenue           $ 285.4     $ 270.5            5.5 %     $   564.2     $ 535.1            5.4 %


                                                Quarter Ended                           Six Months Ended
                                                September 30,                             September 30,
Total Software Revenue                        2012        2011        % Change          2012         2011        % Change
                                                (In millions)                             (In millions)
Enterprise Service Management                $ 290.9     $ 291.6           (0.2 )%    $   544.5     $ 551.3           (1.2 )%
Mainframe Service Management                   203.7       208.6           (2.3 )%        400.5       403.0           (0.6 )%

Total software revenue                       $ 494.6     $ 500.2           (1.1 )%    $   945.0     $ 954.3           (1.0 )%

Software License Revenue

License revenue for the quarter ended September 30, 2012 was $209.2 million, a decrease of $20.5 million, or 8.9%, from the prior year quarter. This decrease was attributable to decreases in ESM and MSM license revenue, as further discussed below. Recognition of license revenue that was deferred in prior periods decreased $8.7 million for the quarter ended September 30, 2012 as compared to the prior year quarter. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront was 60% in the current quarter as compared to 64% in the prior year quarter.

License revenue for the six months ended September 30, 2012 was $380.8 million, a decrease of $38.4 million, or 9.2%, from the prior year period. This decrease was attributable to a decrease in ESM license revenue, as further discussed below, while MSM license revenue remained relatively flat as compared to the prior year period. Recognition of license revenue that was deferred in prior periods decreased $18.5 million for the six months ended September 30, 2012 as compared to the prior year period. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront was 59% in the current six month period as compared to 54% in the prior year period.

ESM license revenue was $129.0 million, or 61.7%, and $226.1 million, or 59.4%, of our total license revenue for the quarter and six months ended September 30, 2012, respectively, and $146.0 million, or 63.6%, and $264.5 million, or 63.1%, of our total license revenue for the quarter and six months ended September 30, 2011, respectively. ESM license revenue for the quarter ended September 30, 2012 decreased by $17.0 million, or 11.6%, from the prior year quarter, due to a $9.9 million decrease in the recognition of previously deferred license revenue and a $7.1 million reduction in upfront license revenue recognized in connection with new transactions. The decrease in upfront license revenue recognized in the quarter ended September 30, 2012 was attributable to a lower percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms, partially offset by an increase in license bookings. ESM license revenue for the six months ended September 30, 2012 decreased by $38.4 million, or 14.5%, from the prior year period, due to a $22.2 million decrease in the recognition of previously deferred license revenue and a $16.2 million reduction in upfront license revenue in connection with new transactions. The decrease in upfront license revenue recognized in the six months ended September 30, 2012 was attributable to a decrease in license transaction bookings along with a lower percentage of such bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms.


Table of Contents

MSM license revenue was $80.2 million, or 38.3%, and $154.7 million, or 40.6%, of our total license revenue for the quarter and six months ended September 30, 2012, and $83.7 million, or 36.4%, and $154.7 million, or 36.9%, of our total license revenue for the quarter and six months ended September 30, 2011. MSM license revenue for the quarter ended September 30, 2012 decreased by $3.5 million, or 4.2%, from the prior year quarter. This decrease was due to a $4.7 million decrease in the amount of upfront license revenue recognized in connection with new transactions, partially offset by a $1.2 million increase in the recognition of previously deferred license revenue. The decrease in upfront license revenue recognized in the quarter ended September 30, 2012 was attributable to a decrease in license bookings along with a slight decrease in the percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms. MSM license revenue for the six months ended September 30, 2012 remained flat as compared to the prior year period.

Deferred License Revenue

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



                                                   Quarter Ended               Six Months Ended
                                                   September 30,                 September 30,
                                                2012           2011           2012           2011
                                                                  (In millions)
Deferrals of license revenue                   $  75.6       $   67.9       $  129.1       $  174.0
Recognition from deferred license revenue        (98.2 )       (106.9 )       (192.7 )       (211.2 )
Impact of foreign currency exchange rate
changes                                            1.2           (3.2 )         (1.5 )         (2.0 )

Net decrease in deferred license revenue       $ (21.4 )     $  (42.2 )     $  (65.1 )     $  (39.2 )

Deferred license revenue balance at end of
period                                         $ 625.6       $  646.9       $  625.6       $  646.9

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 September 30, 2012, the deferred license revenue balance was $625.6 million. Estimated future recognition from deferred license revenue at September 30, 2012 is (in millions):

                       Remainder of fiscal 2013     $ 179.6
                       Fiscal 2014                    225.8
                       Fiscal 2015 and thereafter     220.2

                                                    $ 625.6

Software Maintenance Revenue

Maintenance revenue for the quarter ended September 30, 2012 was $285.4 million, an increase of $14.9 million, or 5.5%, 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 for the six months ended September 30, 2012 was $564.2 million, an increase of $29.1 million, or 5.4%, over the prior year period, 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 $6.3 million and $2.4 million for the quarters ended September 30, 2012 and 2011, respectively, and $11.9 million and $3.5 million for the six months ended September 30, 2012 and 2011, respectively.


Table of Contents

ESM maintenance revenue was $161.9 million, or 56.7%, and $318.4 million, or 56.4%, of our total maintenance revenue for the quarter and six months ended September 30, 2012, respectively, and $145.6 million, or 53.8%, and $286.8 million, or 53.6%, of our total maintenance revenue for the quarter and six months ended September 30, 2011, respectively. ESM maintenance revenue for the quarter ended September 30, 2012 increased by $16.3 million, or 11.2%, over the prior year quarter. ESM maintenance revenue for the six months ended September 30, 2012 increased by $31.6 million, or 11.0%, over the prior year period. These increases were attributable primarily to an expanded installed ESM customer license base and increases in SaaS subscription revenue.

MSM maintenance revenue was $123.5 million, or 43.3%, and $245.8 million, or 43.6%, of our total maintenance revenue for the quarter and six months ended September 30, 2012, respectively, and $124.9 million, or 46.2%, and $248.3 million, or 46.4%, of our total maintenance revenue for the quarter and six months ended September 30, 2011, respectively. MSM maintenance revenue for the quarter ended September 30, 2012 decreased by $1.4 million, or 1.1%, from the prior year quarter. MSM maintenance revenue for the six months ended September 30, 2012 decreased by $2.5 million, or 1.0%, from the prior year period.

Deferred Maintenance Revenue

At September 30, 2012, the deferred maintenance revenue balance was
$1.2 billion. Estimated future recognition from deferred maintenance revenue at
September 30, 2012 is (in millions):



                      Remainder of fiscal 2013     $   414.3
                      Fiscal 2014                      417.3
                      Fiscal 2015 and thereafter       344.7

                                                   $ 1,176.3

Domestic vs. International Revenue



                                         Quarter Ended                            Six Months Ended
. . .
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