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.

Overview

A summary of select operating metrics for the quarter and nine months ended December 31, 2012 is as follows:

• Total bookings, which represent the contract value of new transactions that we closed and recorded, were $514.3 million for the quarter, representing a decrease of $10.1 million, or 1.9%, from the prior year quarter, and for the nine months ended December 31, 2012 were $1,415.0 million, representing a decrease of $107.2 million, or 7.0%, from the prior year period. Within the first nine months 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 $228.3 million for the quarter, representing a decrease of $8.5 million, or 3.6%, from the prior year quarter, and for the nine months ended December 31, 2012 were $544.0 million, representing a decrease of $72.8 million, or 11.8%, from the prior year period. During the quarter, we closed 41 transactions with license bookings over $1 million (with total license bookings of $115.4 million) compared to 42 transactions with license bookings over $1 million (with total license bookings of $117.7 million) in the prior year quarter. During the nine months ended December 31, 2012, we closed 96 transactions with license bookings over $1 million (with total license bookings of $262.5 million) compared to 110 transactions with license bookings over $1 million (with total license bookings of $336.2 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 decreased by $10.3 million, or 8.2%, from the prior year quarter, and for the nine months ended December 31, 2012 decreased by $19.4 million, or 5.5%, from the prior year period. We estimate that the impact of foreign currency exchange rate changes, while nominal for the quarter, contributed to an approximate $4 million, or 1%, reduction in ESM license bookings for the nine month period. The license bookings decreases for both the quarter and nine month periods were driven primarily by a number of large, forecasted license transactions that failed to close at the end of the quarter, which we attribute to a combination of difficult macroeconomic conditions, perceived uncertainty related to our strategic announcements early in the quarter and preceding press coverage related to activist investor activity, as well as internal sales execution issues. Additionally, while sales force capacity has reached planned levels, we believe that overall productivity for both the quarter and nine month periods was negatively impacted by lower sales force and sales management 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 December 31, 2012 decreased by $161.4 million, or 17.4%, and on an annualized basis, after normalizing for contract length, decreased by $38.6 million, or 13.2%, 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 December 31, 2012, total MSM bookings decreased by $35.6 million, or 1.4%, and on an annualized basis, after normalizing for contract length, decreased by $9.9 million, or 1.2%, as compared to the prior year period.

• Total revenue for the quarter was $580.2 million, representing an increase of $32.0 million, or 5.8%, over the prior year quarter, and for the nine months ended December 31, 2012 was $1,632.8 million, representing an increase of $25.5 million, or 1.6%, over the prior year period. Revenue contributed by Numara Software, Inc., which we acquired during the fourth quarter of fiscal 2012, was $20.2 million and $56.3 million for the quarter and nine months ended December 31, 2012, respectively. The increase in revenue for the quarter was reflective of increases of $7.3 million, or 3.2%, $16.4 million, or 6.0%, and $8.3 million, or 16.3%, in license, maintenance and professional services revenue, respectively. The increase for the nine months ended December 31, 2012 was reflective of increases of $45.6 million, or 5.6%, and $11.0 million, or 7.1%, in maintenance and professional services revenue, respectively, partially offset by a decrease of $31.1 million, or 4.8%, in license revenue. On a segment basis, ESM-Solutions revenue for the quarter increased by $14.2 million, or 5.0%, ESM-Services revenue increased by $8.3 million, or 16.3%, and MSM revenue increased by $9.5 million, or 4.4%, as compared to the prior year quarter. For the nine months ended December 31, 2012, ESM-Solutions revenue increased by $7.5 million, or 0.9%, ESM-Services revenue increased by $11.0 million, or 7.1%, and MSM revenue increased by $7.0 million, or 1.1%, over the prior year period. We estimate that foreign currency exchange rate fluctuations negatively affected revenue by approximately $3 million, or 1%, for the quarter, and approximately $19 million, or 1%, for the nine months ended December 31, 2012, as compared to the respective prior year periods, on a constant currency basis.

• Operating income for the quarter was $147.6 million, representing a decrease of $14.2 million, or 8.8%, from the prior year quarter, and for the nine months ended December 31, 2012 was $359.6 million, representing a decrease of $78.3 million, or 17.9%, from the prior year period. Non-GAAP operating income for the quarter was $210.2 million, representing a decrease of $2.5 million, or 1.2%, from the prior year quarter, and for the nine months ended December 31, 2012 was $556.6 million, representing a decrease of $43.0 million, or 7.2%, from the prior year period.

• Diluted earnings per share for the quarter was $0.70, representing a decrease of $0.01 per share, or 1.4%, from the prior year quarter, and for the nine months ended December 31, 2012 was $1.63, representing a decrease of $0.25 per share, or 13.3%, from the prior year period. Non-GAAP diluted earnings per share was $0.99, representing an increase of $0.06 per share, or 6.5%, over the prior year quarter, and for the nine months ended December 31, 2012 was $2.50, representing a decrease of $0.01 per share, or 0.4%, from the prior year period.

• Cash flows from operations for the nine months ended December 31, 2012 were $417.9 million, representing a decrease of $169.5 million, or 28.9%, from the prior year period. We closed out the quarter with a solid balance sheet at December 31, 2012, including $1.3 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 nine months ended December 31, 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. In October 2012, our Board of Directors approved a new $1 billion stock repurchase program, and in November 2012, we entered into an accelerated share repurchase agreement to repurchase $750 million of our common stock under this program. Initial shares received under this repurchase agreement were 13.1 million, for a total value of $525.0 million. During the quarter and nine months ended December 31, 2012, we repurchased a total of 14.3 million and 22.6 million shares, respectively, for a total value of $575.0 million and $925.0 million, respectively.

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
                                             Quarter Ended             Nine Months Ended
                                             December 31,                 December 31,
                                          2012          2011           2012          2011
 Revenue:
 License                                    40.0 %        41.0 %         37.5 %        40.1 %
 Maintenance                                49.8 %        49.7 %         52.2 %        50.2 %
 Professional services                      10.2 %         9.3 %         10.2 %         9.7 %
 Total revenue                             100.0 %       100.0 %        100.0 %       100.0 %
 Operating expenses:
 Cost of license revenue                     7.1 %         7.0 %          7.4 %         7.2 %
 Cost of maintenance revenue                 8.8 %         8.4 %          9.5 %         8.7 %
 Cost of professional services revenue       9.7 %         9.6 %         10.3 %         9.5 %
 Selling and marketing expenses             30.3 %        28.1 %         30.8 %        28.1 %
 Research and development expenses           7.2 %         7.0 %          7.1 %         7.6 %
 General and administrative expenses         9.7 %         9.2 %         10.7 %        10.0 %
 Amortization of intangible assets           1.7 %         1.1 %          2.1 %         1.6 %
 Total operating expenses                   74.6 %        70.5 %         78.0 %        72.8 %
 Operating income                           25.4 %        29.5 %         22.0 %        27.2 %
 Other loss, net                            (1.8 )%       (0.6 )%        (1.6 )%       (0.6 )%
 Earnings before income taxes               23.6 %        28.9 %         20.5 %        26.6 %
 Provision for income taxes                  5.3 %         7.0 %          4.6 %         6.1 %
 Net earnings                               18.3 %        21.9 %         15.8 %        20.5 %

Revenue

The following tables provide information regarding software license and software
maintenance revenue for the quarters and nine months ended December 31, 2012 and
2011:



                                              Quarter Ended                           Nine Months Ended
                                              December 31,                               December 31,
Software License Revenue                    2012        2011        % Change           2012         2011        % Change
                                              (In millions)                             (In millions)
Enterprise Service Management              $ 131.3     $ 133.7           (1.8 )%    $    357.4     $ 398.2          (10.2 )%
Mainframe Service Management                 101.0        91.3           10.6 %          255.7       246.0            3.9 %

Total software license revenue             $ 232.3     $ 225.0            3.2 %     $    613.1     $ 644.2           (4.8 )%

                                                 Quarter Ended                           Nine Months Ended
                                                 December 31,                               December 31,
Software Maintenance Revenue                   2012        2011        % Change           2012         2011        % Change
                                                 (In millions)                             (In millions)
Enterprise Service Management                 $ 164.3     $ 147.7           11.2 %     $    482.8     $ 434.5           11.1 %
Mainframe Service Management                    124.4       124.6           (0.2 )%         370.2       372.9           (0.7 )%

Total software maintenance revenue            $ 288.7     $ 272.3            6.0 %     $    853.0     $ 807.4            5.6 %

                                           Quarter Ended                          Nine Months Ended
                                           December 31,                             December 31,
Total Software Revenue                   2012        2011       % Change         2012          2011        % Change
                                           (In millions)                            (In millions)
Enterprise Service Management           $ 295.6     $ 281.4           5.0 %    $   840.2     $   832.7           0.9 %
Mainframe Service Management              225.4       215.9           4.4 %        625.9         618.9           1.1 %

Total software revenue                  $ 521.0     $ 497.3           4.8 %    $ 1,466.1     $ 1,451.6           1.0 %

Software License Revenue

License revenue for the quarter ended December 31, 2012 was $232.3 million, an increase of $7.3 million, or 3.2%, over the prior year quarter. This increase was attributable to an increase in MSM license revenue, partially offset by a decrease in ESM license revenue, as further discussed below. Recognition of license revenue that was deferred in prior periods increased $2.3 million for the quarter ended December 31, 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 55% in the prior year quarter.

License revenue for the nine months ended December 31, 2012 was $613.1 million, a decrease of $31.1 million, or 4.8%, from the prior year period. 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 $16.2 million for the nine months ended December 31, 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 nine month period as compared to 54% in the prior year period.

ESM license revenue was $131.3 million, or 56.5%, and $357.4 million, or 58.3%, of our total license revenue for the quarter and nine months ended December 31, 2012, respectively, and $133.7 million, or 59.4%, and $398.2 million, or 61.8%, of our total license revenue for the quarter and nine months ended December 31, 2011, respectively. ESM license revenue for the quarter ended December 31, 2012 decreased by $2.4 million, or 1.8%, from the prior year quarter, due to a $4.8 million reduction in upfront license revenue recognized in connection with new transactions, partially offset by a $2.4 million increase in the recognition of previously deferred license revenue. The decrease in upfront license revenue recognized in the quarter ended December 31, 2012 was attributable to a decrease in license transaction bookings, partially offset by a higher percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms. ESM license revenue for the nine months ended December 31, 2012 decreased by $40.8 million, or 10.2%, from the prior year period, due to a $19.7 million decrease in the recognition of previously deferred license revenue and a $21.0 million reduction in upfront license revenue in connection with new transactions. The decrease in upfront license revenue recognized in the nine months ended December 31, 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.

MSM license revenue was $101.0 million, or 43.5%, and $255.7 million, or 41.7%, of our total license revenue for the quarter and nine months ended December 31, 2012, and $91.3 million, or 40.6%, and $246.0 million, or 38.2%, of our total license revenue for the quarter and nine months ended December 31, 2011. MSM license revenue for the quarter ended December 31, 2012 increased by $9.7 million, or 10.6%, over the prior year quarter. This increase was due primarily to a $9.8 million increase in the amount of upfront license revenue recognized in connection with new transactions, while the recognition of previously deferred license revenue remained relatively flat. The increase in upfront license revenue recognized in the quarter ended December 31, 2012 was attributable to an increase in the percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms along with an increase in license transaction bookings. MSM license revenue for the nine months ended December 31, 2012 increased by $9.7 million, or 3.9%, over the prior year period, due to a $6.2 million increase in upfront license revenue in connection with new transactions and a $3.5 million increase in the recognition of previously deferred license revenue. The increase in upfront license revenue recognized in the nine months ended December 31, 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 transaction bookings.

Deferred License Revenue

For the quarters ended December 31, 2012 and 2011, our recognized license
revenue was impacted by the changes in our deferred license revenue balance as
follows:



                                                   Quarter Ended              Nine Months Ended
                                                   December 31,                 December 31,
                                                2012          2011           2012           2011
                                                                  (In millions)
Deferrals of license revenue                   $  94.9       $ 107.6       $  224.0       $  281.6
Recognition from deferred license revenue        (98.1 )       (95.8 )       (290.8 )       (307.0 )
Impact of foreign currency exchange rate
changes                                           (0.8 )          -            (2.3 )         (2.0 )

Net increase (decrease) in deferred license
revenue                                        $  (4.0 )     $  11.8       $  (69.1 )     $  (27.4 )

Deferred license revenue balance at end of
period                                         $ 621.6       $ 658.7       $  621.6       $  658.7

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 December 31, 2012, the deferred license revenue balance was $621.6 million. Estimated future recognition from deferred license revenue at December 31, 2012 is (in millions):

                       Remainder of fiscal 2013     $  92.6
                       Fiscal 2014                    260.7
                       Fiscal 2015 and thereafter     268.3

                                                    $ 621.6

Software Maintenance Revenue

Maintenance revenue for the quarter ended December 31, 2012 was $288.7 million, an increase of $16.4 million, or 6.0%, over the prior year quarter, due to an increase in ESM maintenance revenue, partially offset by a nominal decrease in MSM maintenance revenue, as discussed below. Maintenance revenue for the nine months ended December 31, 2012 was $853.0 million, an increase of $45.6 million, or 5.6%, 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 $6.8 million and $2.6 million for the quarters ended December 31, 2012 and 2011, respectively, and $18.7 million and $6.0 million for the nine months ended December 31, 2012 and 2011, respectively.

ESM maintenance revenue was $164.3 million, or 56.9%, and $482.8 million, or 56.6%, of our total maintenance revenue for the quarter and nine months ended December 31, 2012, respectively, and $147.7 million, or 54.2%, and $434.5 million, or 53.8%, of our total maintenance revenue for the quarter and nine months ended December 31, 2011, respectively. ESM maintenance revenue for the quarter ended December 31, 2012 increased by $16.6 million, or 11.2%, over the prior year quarter. ESM maintenance revenue for the nine months ended December 31, 2012 increased by $48.3 million, or 11.1%, 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 $124.4 million, or 43.1%, and $370.2 million, or . . .