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BMC > SEC Filings for BMC > Form 10-K on 9-May-2013All Recent SEC Filings

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Form 10-K for BMC SOFTWARE INC


9-May-2013

Annual Report


ITEM 7. 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 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.

As discussed in Item 1. Business - Merger Agreement, on May 6, 2013, BMC entered into an Agreement and Plan of Merger with an entity formed by affiliates of investment funds advised by Bain Capital, LLC, Golden Gate Private Equity, Inc. and Insight Venture Management, LLC, and an entity affiliated with GIC Special Investments Pte Ltd.

Overview

A summary of select operating metrics for the year ended March 31, 2013 is as follows:

Total bookings, which represent the contract value of transactions closed and recorded, were $2,182.8 million, essentially flat as compared to fiscal 2012. During fiscal 2012, one large transaction generated total bookings of over $100 million, principally related to our MSM business.

Total license bookings were $841.8 million, representing a decrease of $40.6 million, or 4.6%, from fiscal 2012. During fiscal 2013, we closed 142 transactions with license values over $1 million (with total license bookings of $447.7 million) compared with 158 transactions with license values over $1 million (with total license bookings of $480.0 million) in fiscal 2012.

Within our ESM-Solutions segment, where we evaluate performance on the basis of license bookings, total license bookings decreased by $6.3 million, or 1.2%, from fiscal 2012. This decrease was principally due to the impact of foreign currency exchange rate changes which contributed to an approximate $6 million, or 1%, reduction in ESM license bookings for the fiscal year.

Within our MSM segment, where we evaluate performance based on total and annualized bookings, total bookings for the trailing twelve months ended March 31, 2013 decreased by $63.7 million, or 7.1%, and on an annualized basis, after normalizing for contract length, increased by $13.2 million, or 5.0%, as compared to the prior year period. Over the trailing 36 months ended March 31, 2013, total MSM bookings increased by $18.1 million or 0.7%, and annualized bookings, after normalizing for contract length, were relatively flat as compared to the prior period.

Total revenue was $2,201.4 million, representing an increase of $29.4 million, or 1.4%, over fiscal 2012. This increase was reflective of maintenance and professional services revenue increases of $58.7 million, or 5.4%, and $10.0 million, or 4.7%, respectively, partially offset by a decrease in license revenue of $39.3 million, or 4.5%. On a segment basis, total ESM-Solutions revenue increased by $7.4 million, or 0.7%, total ESM-Services revenue increased by $10.0 million, or 4.7%, and total MSM revenue increased by $12.0 million, or 1.4%, over fiscal 2012.

Operating income was $465.4 million, representing a decrease of $78.5 million, or 14.4%, from fiscal 2012. This decrease was attributable primarily to the impact of increased sales and other compensation expense as well as severance, exit costs and other restructuring charges incurred as a result of our fiscal 2013 operational review. Non-GAAP operating income was $740.6 million, representing a decrease of $39.0 million, or 5.0%, from fiscal 2012.

Net earnings were $331.0 million, representing a decrease of $70.0 million, or 17.5%, from fiscal 2012. Non-GAAP net earnings were $524.4 million, representing a decrease of $37.7 million, or 6.7%, from fiscal 2012.

Diluted earnings per share was $2.13, representing a decrease of $0.19, or 8.2%, from fiscal 2012. Non-GAAP diluted earnings per share was $3.37, representing an increase of $0.12, or 3.7%, over fiscal 2012.

Cash flows from operations were $765.1 million, representing a decrease of $35.2 million, or 4.4%, from fiscal 2012. We closed out the year with a solid balance sheet at March 31, 2013, including $1.6 billion in cash, cash equivalents and investments and $2.0 billion in deferred revenue.


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During the fourth quarter of fiscal 2013, we conducted a company-wide operational review to streamline our operations and reallocate resources to strategic areas of our business. As a result of this operational review, we recorded a $19.9 million charge for severance and related costs associated with workforce reductions in business unit and corporate functions across geographies in which we operate, as well as an asset impairment charge of $7.5 million related to certain capitalized development projects that are being discontinued. We estimate that an additional charge of up to $18 million for severance and related costs will be incurred in the first half of fiscal 2014, at which time this initiative will be substantially complete. While we estimate that the above workforce reductions will result in fiscal 2014 operating expense savings, we anticipate that these expense reductions will be substantially offset in fiscal 2014 by incremental personnel-related expenses, mostly due to headcount growth in other strategic areas of our business.

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 in our ESM segment during fiscal 2013 for aggregate purchase consideration of $19.5 million. Our acquisitions included 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 $1.0 billion stock repurchase program, and in November 2012 we entered into an accelerated share repurchase agreement to repurchase $750.0 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. The agreement contemplates that the remaining shares will be settled no later than approximately seven months from the execution of the agreement. During fiscal 2013, we repurchased approximately 22.7 million shares for a total value of $925.0 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.

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 2013 Acquisitions

During fiscal 2013, we completed the acquisitions of 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, for total combined purchase consideration of $19.5 million.


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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 purchase consideration of $304.1 million, and Coradiant Inc., a global provider of end-to-end performance management of web applications, for total purchase 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 total combined purchase 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 total combined purchase consideration of $51.5 million.

Historical Information

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,
                                               2013            2012          2011
     Revenue:
     License                                      38.1 %         40.4 %        41.8 %
     Maintenance                                  51.7 %         49.8 %        49.6 %
     Professional services                        10.2 %          9.8 %         8.6 %
     Total revenue                               100.0 %        100.0 %       100.0 %
     Operating expenses:
     Cost of license revenue                       7.2 %          7.3 %         6.3 %
     Cost of maintenance revenue                   9.5 %          9.1 %         8.2 %
     Cost of professional services revenue        10.2 %          9.8 %         9.0 %
     Selling and marketing expenses               31.2 %         29.2 %        29.6 %
     Research and development expenses             7.9 %          7.6 %         8.8 %
     General and administrative expenses          10.8 %         10.0 %        10.7 %
     Amortization of intangible assets             2.0 %          1.9 %         1.6 %
     Total operating expenses                     78.9 %         75.0 %        74.2 %
     Operating income                             21.1 %         25.0 %        25.8 %
     Other expense, net                           (1.7 )%        (0.6 )%       (0.1 )%
     Earnings before income taxes                 19.4 %         24.4 %        25.7 %
     Provision for income taxes                    4.4 %          5.9 %         3.6 %
     Net earnings                                 15.0 %         18.5 %        22.1 %


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Revenue

The following table provides information regarding software license and software
maintenance revenue for fiscal 2013, 2012 and 2011.



                                                                                                   Percentage Change
                                                                                              2013                    2012
                                                     Year Ended March 31,                 Compared  to            Compared  to
Software License Revenue                      2013           2012           2011              2012                    2011
                                                         (In millions)
Enterprise Service Management               $   490.5      $   543.3      $   550.9                 (9.7 )%                (1.4 )%
Mainframe Service Management                    348.0          334.5          313.6                  4.0 %                  6.7 %

Total software license revenue              $   838.5      $   877.8      $   864.5                 (4.5 )%                 1.5 %


                                                                                                   Percentage Change
                                                                                              2013                    2012
                                                     Year Ended March 31,                  Compared to            Compared to
Software Maintenance Revenue                  2013           2012           2011              2012                    2011
                                                         (In millions)
Enterprise Service Management               $   645.2      $   585.0      $   551.5                 10.3 %                  6.1 %
Mainframe Service Management                    493.9          495.4          472.7                 (0.3 )%                 4.8 %

Total software maintenance revenue          $ 1,139.1      $ 1,080.4      $ 1,024.2                  5.4 %                  5.5 %


                                                                                                   Percentage Change
                                                                                              2013                    2012
                                                     Year Ended March 31,                  Compared to            Compared to
Total Software Revenue                        2013           2012           2011              2012                    2011
                                                         (In millions)
Enterprise Service Management               $ 1,135.7      $ 1,128.3      $ 1,102.4                  0.7 %                  2.3 %
Mainframe Service Management                    841.9          829.9          786.3                  1.4 %                  5.5 %

Total software revenue                      $ 1,977.6      $ 1,958.2      $ 1,888.7                  1.0 %                  3.7 %

Software License Revenue

License revenue in fiscal 2013 was $838.5 million, a decrease of $39.3 million, or 4.5%, from fiscal 2012. 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 $19.6 million in fiscal 2013 as compared to fiscal 2012. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront was 54% in fiscal 2013, consistent with fiscal 2012.

License revenue in fiscal 2012 was $877.8 million, an increase of $13.3 million, or 1.5%, over fiscal 2011. 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 by $9.7 million in fiscal 2012 as compared to fiscal 2011. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront was 54% in fiscal 2012 as compared to 51% in fiscal 2011.

ESM license revenue was $490.5 million, or 58.5%, $543.3 million, or 61.9%, and $550.9 million, or 63.7%, of our total license revenue for fiscal 2013, 2012 and 2011, respectively. ESM license revenue in fiscal 2013 decreased by $52.8 million, or 9.7%, from fiscal 2012, due to a $31.3 million decrease in the amount of upfront license revenue recognized in connection with new transactions and a $21.5 million decrease in the recognition of previously deferred license revenue. The decrease in upfront license revenue recognized in fiscal 2013 was attributable to a decrease in license transaction bookings along with a lower percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms. 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. The increase in upfront license revenue recognized 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.


Table of Contents

MSM license revenue was $348.0 million, or 41.5%, $334.5 million, or 38.1%, and $313.6 million, or 36.3%, of our total license revenue for fiscal 2013, 2012 and 2011, respectively. MSM license revenue in fiscal 2013 increased by $13.5 million, or 4.0%, over fiscal 2012, due to an $11.6 million increase in the amount of upfront license revenue recognized in connection with new transactions and a $1.9 million increase in the recognition of previously deferred license revenue. The increase in upfront license revenue recognized 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, partially offset by a decrease in license transaction bookings. MSM license revenue in fiscal 2012 increased by $20.9 million, or 6.7%, over fiscal 2011, due to a $23.1 million increase in the recognition of previously deferred license revenue, partially offset by a $2.2 million decrease in the amount of upfront license revenue recognized in connection with new transactions. The decrease in upfront license revenue recognized was attributable to decrease in the 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 transaction bookings.

For fiscal 2013, 2012 and 2011, our recognized license revenue was impacted by the changes in our deferred license revenue balance as follows:

                                                            Year Ended March 31,
                                                      2013          2012          2011
                                                               (In millions)
Deferrals of license revenue                        $  390.9      $  410.4      $  454.1
Recognition from deferred license revenue             (384.9 )      (404.5 )      (394.8 )
Impact of foreign currency exchange rate changes        (2.7 )        (1.3 )         2.6

Net increase in deferred license revenue            $    3.3      $    4.6      $   61.9

Deferred license revenue balance at end of period   $  694.0      $  690.7      $  686.1

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 March 31, 2013, the deferred license revenue balance was $694.0 million. Estimated future recognition from deferred license revenue at March 31, 2013 is (in millions):

                       Fiscal 2014                  $ 319.6
                       Fiscal 2015                    182.2
                       Fiscal 2016 and thereafter     192.2

                                                    $ 694.0

Software Maintenance Revenue

Maintenance revenue in fiscal 2013 was $1,139.1 million, an increase of $58.7 million, or 5.4% over fiscal 2012, due to an increase in ESM maintenance revenue, partially offset by a decrease in MSM maintenance revenue, as discussed below. Maintenance revenue in fiscal 2012 was $1,080.4 million, an increase of $56.2 million, or 5.5% over fiscal 2011, due to increases in maintenance revenue in both our ESM and MSM segments, as discussed below. Maintenance revenue for fiscal 2013 and 2012 included $27.9 million and $9.7 million, respectively, of revenue from our SaaS offerings, which is included in our ESM segment. Maintenance revenue from our SaaS offerings was a nominal amount in fiscal 2011.


Table of Contents

ESM maintenance revenue was $645.2 million, or 56.6%, $585.0 million, or 54.1%, and $551.5 million, or 53.8%, of our total maintenance revenue for fiscal 2013, 2012 and 2011, respectively. ESM maintenance revenue in fiscal 2013 increased by $60.2 million, or 10.3%, over fiscal 2012. ESM maintenance revenue in fiscal 2012 increased by $33.5 million, or 6.1%, over fiscal 2011. These year over year increases were attributable primarily to the expansion of our installed ESM customer license base, including the impact from acquisitions, and increases in SaaS subscription revenue.

MSM maintenance revenue was $493.9 million, or 43.4%, $495.4 million, or 45.9%, and $472.7 million, or 46.2%, of our total maintenance revenue for fiscal 2013, 2012 and 2011, respectively. MSM maintenance revenue in fiscal 2013 decreased by $1.5 million, or 0.3%, from fiscal 2012. 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 increased capacities of the installed base.

At March 31, 2013, the deferred maintenance revenue balance was $1.2 billion. Estimated future recognition from deferred maintenance revenue at March 31, 2013 is (in millions):

                      Fiscal 2014                  $   686.5
                      Fiscal 2015                      299.2
                      Fiscal 2016 and thereafter       260.9

                                                   $ 1,246.6

Domestic vs. International Revenue



                                                                                             Percentage Change
                                                                                         2013                  2012
                                                Year Ended March 31,                 Compared to            Compared to
                                         2013           2012           2011              2012                  2011
                                                    (In millions)
License:
Domestic                               $   397.4      $   412.5      $   420.4                (3.7 )%               (1.9 )%
International                              441.1          465.3          444.1                (5.2 )%                4.8 %

Total license revenue                      838.5          877.8          864.5                (4.5 )%                1.5 %

Maintenance:
Domestic                                   627.9          581.7          556.8                 7.9 %                 4.5 %
International                              511.2          498.7          467.4                 2.5 %                 6.7 %

Total maintenance revenue                1,139.1        1,080.4        1,024.2                 5.4 %                 5.5 %

Professional services:
Domestic                                   103.3          103.6           85.9                (0.3 )%               20.6 %
International                              120.5          110.2           90.7                 9.3 %                21.5 %

Total professional services revenue        223.8          213.8          176.6                 4.7 %                21.1 %

Total domestic revenue                   1,128.6        1,097.8        1,063.1                 2.8 %                 3.3 %
Total international revenue              1,072.8        1,074.2        1,002.2                (0.1 )%                7.2 %

Total revenue                          $ 2,201.4      $ 2,172.0      $ 2,065.3                 1.4 %                 5.2 %

We estimate that foreign currency exchange rate fluctuations caused an . . .

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