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BMC > SEC Filings for BMC > Form 10-Q on 5-Aug-2013All Recent SEC Filings

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Form 10-Q for BMC SOFTWARE INC


5-Aug-2013

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, 2013, 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, 2013.

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, 2013, 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.

On May 6, 2013, BMC entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which it will be acquired by Boxer Parent Company Inc. (Parent), a Delaware corporation 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 (together, the Sponsors), through a merger of a wholly-owned subsidiary of Parent (Merger Sub) with and into the Company (the Merger).

On July 24, 2013, the Board provided its consent (the "Company Consent") to a rollover contribution by Elliott, a current stockholder of the Company, to Parent of approximately $137 million (the "Elliott Rollover") at a price which represents a premium to the investment price paid by the Sponsors. In connection with the Company Consent, Parent, Merger Sub and the Company entered into Amendment No. 1 to the Merger Agreement (the Amendment). The Amendment provides that the Company has the right to revoke the Company Consent and terminate Elliott's rights and obligations to the Company with respect to the Elliott Rollover, in the event (i) the Elliott Rollover will or would reasonably be expected to result in a non-de minimis delay of the consummation of the transactions contemplated by the Merger Agreement or (ii) the equity commitment letter entered into by Elliott in connection with the Elliott Rollover is terminated under certain specified circumstances.

Also on July 24, 2013, BMC's stockholders approved a proposal to adopt the Merger Agreement.


Table of Contents

Overview

A summary of select operating metrics for the quarter ended June 30, 2013 is as follows:

Total bookings, which represent the contract value of new transactions that we closed and recorded, were $496.9 million for the quarter, representing an increase of $26.6 million, or 5.7%, over the prior year quarter.

Total license bookings were $90.7 million for the quarter, representing a decrease of $37.2 million, or 29.1%, from the prior year quarter. During the quarter, we closed nine transactions with license bookings over $1 million (with total license bookings of $29.5 million) compared to 21 transactions with license bookings over $1 million (with total license bookings of $53.8 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 $36.0 million, or 40.4%, from the prior year quarter. Overall, we attribute this decrease to a combination of difficult macroeconomic conditions, short-term impacts related to the implementation of a corporate reorganization announced in the fourth quarter of fiscal 2013 and the announcement of the Merger Agreement on May 6, 2013.

Within our MSM segment, where we evaluate performance based on total and annualized bookings, total bookings for the trailing twelve months ended June 30, 2013 increased by $75.9 million, or 9.8%, and on an annualized basis, after normalizing for contract length, increased by $12.7 million, or 4.8%, as compared to the prior year period. These trailing twelve months increases were attributable primarily to the timing of transaction renewal cycles. Over the trailing 36 months ended June 30, 2013, total MSM bookings increased by $56.7 million, or 2.2%, and on an annualized basis, after normalizing for contract length, increased by $13.8 million, or 1.7%, as compared to the prior year period.

Total revenue for the quarter was $483.6 million, representing a decrease of $20.8 million, or 4.1%, from the prior year quarter. This decrease was reflective of decreases of $30.6 million, or 17.8%, and $0.7 million, or 1.3%, in license and professional services revenue, respectively, partially offset by an increase of $10.5 million, or 3.8%, in maintenance revenue. On a segment basis, ESM-Solutions revenue for the quarter decreased by $16.1 million, or 6.3%, ESM-Services revenue decreased by $0.7 million, or 1.3%, and MSM revenue decreased by $4.0 million, or 2.0%, as compared to the prior year quarter.

Operating income for the quarter was $69.7 million, representing a decrease of $4.2 million, or 5.7%, from the prior year quarter. Non-GAAP operating income for the quarter was $155.2 million, representing an increase of $7.2 million, or 4.9%, over the prior year quarter.

Net earnings for the quarter were $52.5 million, representing a decrease of $1.6 million, or 3.0%, from the prior year quarter. Non-GAAP net earnings for the quarter were $111.5 million, representing an increase of $5.6 million, or 5.3%, over the prior year quarter.

Diluted earnings per share for the quarter was $0.36, representing an increase of $0.03 per share, or 9.1%, over the prior year quarter. Non-GAAP diluted earnings per share was $0.77, representing an increase of $0.12 per share, or 18.5%, over the prior year quarter.

Cash flows from operations for the quarter ended June 30, 2013 were $267.1 million, representing an increase of $47.5 million, or 21.6%, over the prior year period. We closed out the quarter with a solid balance sheet at June 30, 2013, including $1.8 billion in cash, cash equivalents and investments and $2.0 billion in deferred revenue.

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. Severance and related costs charged to expense related to this initiative during the quarter ended June 30, 2013 were $10.0 million. We estimate that an additional charge of up to $3 million for severance and related costs will be incurred primarily in the second quarter 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.


Table of Contents

We continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. 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. During the quarter ended June 30, 2013, the ASR repurchase period ended, and the Company received approximately 4.1 million additional shares from the financial institution. No additional repurchases were made during the quarter ended June 30, 2013.

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 for the
                                                  Quarter Ended June 30,
                                             2013                        2012
Revenue:
License                                            29.2 %                      34.0 %
Maintenance                                        59.8 %                      55.3 %
Professional services                              11.0 %                      10.7 %
Total revenue                                     100.0 %                     100.0 %
Operating expenses:
Cost of license revenue                             8.3 %                       7.8 %
Cost of maintenance revenue                        10.6 %                      10.1 %
Cost of professional services revenue              10.2 %                      11.4 %
Selling and marketing expenses                     30.3 %                      32.7 %
Research and development expenses                   8.9 %                       8.4 %
General and administrative expenses                15.2 %                      12.5 %
Amortization of intangible assets                   2.1 %                       2.5 %
Total operating expenses                           85.6 %                      85.3 %
Operating income                                   14.4 %                      14.7 %
Other expense, net                                 (2.9 )%                     (1.6 )%
Earnings before income taxes                       11.5 %                      13.0 %
Provision for income taxes                          0.7 %                       2.3 %
Net earnings                                       10.9 %                      10.7 %


Table of Contents

Revenue

The following tables provide information regarding software license and software
maintenance revenue for the quarters ended June 30, 2013 and 2012:



                                         Quarter Ended June 30,
     Software License Revenue            2013              2012          % Change
                                              (In millions)
     Enterprise Service Management    $      72.0       $      97.1          (25.8 )%
     Mainframe Service Management            69.0              74.5           (7.4 )%

     Total software license revenue   $     141.0       $     171.6          (17.8 )%

                                            Quarter Ended June 30,
    Software Maintenance Revenue            2013              2012         % Change
                                                 (In millions)
    Enterprise Service Management        $     165.5       $     156.5           5.8 %
    Mainframe Service Management               123.8             122.3           1.2 %

    Total software maintenance revenue   $     289.3       $     278.8           3.8 %

                                         Quarter Ended June 30,
      Total Software Revenue             2013              2012          % Change
                                              (In millions)
      Enterprise Service Management   $     237.5       $     253.6           (6.3 )%
      Mainframe Service Management          192.8             196.8           (2.0 )%

      Total software revenue          $     430.3       $     450.4           (4.5 )%

Software License Revenue

License revenue for the quarter ended June 30, 2013 was $141.0 million, a decrease of $30.6 million, or 17.8%, 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 $3.1 million for the quarter ended June 30, 2013 as compared to the prior year quarter. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront was 52% in the current quarter as compared to 58% in the prior year quarter.

ESM license revenue was $72.0 million, or 51.1%, and $97.1 million, or 56.6%, of our total license revenue for the quarters ended June 30, 2013 and 2012, respectively. ESM license revenue for the quarter ended June 30, 2013 decreased by $25.1 million, or 25.8%, from the prior year quarter, due to a $23.5 million reduction in upfront license revenue recognized in connection with new transactions and a $1.6 million decrease in the recognition of previously deferred license revenue. The decrease in upfront license revenue recognized in the quarter ended June 30, 2013 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.

MSM license revenue was $69.0 million, or 48.9%, and $74.5 million, or 43.4%, of our total license revenue for the quarters ended June 30, 2013 and 2012, respectively. MSM license revenue for the quarter ended June 30, 2013 decreased by $5.5 million, or 7.4%, from the prior year quarter, due to a $4.0 million reduction in upfront license revenue recognized in connection with new transactions and a $1.5 million decrease in the recognition of previously deferred license revenue. The decrease in upfront license revenue recognized in the quarter ended June 30, 2013 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 as well as a decrease in license transaction bookings.


Table of Contents

Deferred License Revenue

For the quarters ended June 30, 2013 and 2012, our recognized license revenue
was impacted by the changes in our deferred license revenue balance as follows:



                                                         Quarter Ended June 30,
                                                          2013              2012
                                                              (In millions)
   Deferrals of license revenue                        $      43.1        $   53.5
   Recognition from deferred license revenue                 (91.4 )         (94.5 )
   Impact of foreign currency exchange rate changes           (2.0 )          (2.7 )

   Net decrease in deferred license revenue            $     (50.3 )      $  (43.7 )

   Deferred license revenue balance at end of period   $     643.7        $  647.0

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, 2013, the deferred license revenue balance was $643.7 million. Estimated future recognition from deferred license revenue at June 30, 2013 is (in millions):

                       Remainder of fiscal 2014     $ 236.9
                       Fiscal 2015                    191.5
                       Fiscal 2016 and thereafter     215.3

                                                    $ 643.7

Software Maintenance Revenue

Maintenance revenue for the quarter ended June 30, 2013 was $289.3 million, an increase of $10.5 million, or 3.8%, over the prior year quarter, due to an increase in ESM and MSM maintenance revenue, as discussed below. Maintenance revenue included revenue from our SaaS offerings, which is included in our ESM segment, of $11.1 million and $5.6 million for the quarters ended June 30, 2013 and 2012, respectively.

ESM maintenance revenue was $165.5 million, or 57.2%, and $156.5 million, or 56.1%, of our total maintenance revenue for the quarters ended June 30, 2013 and 2012, respectively. ESM maintenance revenue for the quarter ended June 30, 2013 increased by $9.0 million, or 5.8%, over the prior year quarter.

MSM maintenance revenue was $123.8 million, or 42.8%, and $122.3 million, or 43.9%, of our total maintenance revenue for the quarters ended June 30, 2013 and 2012, respectively. MSM maintenance revenue for the quarter ended June 30, 2013 increased by $1.5 million, or 1.2%, over the prior year quarter.


Table of Contents

Deferred Maintenance Revenue

At June 30, 2013, the deferred maintenance revenue balance was $1.3 billion.
Estimated future recognition from deferred maintenance revenue at June 30, 2013
is (in millions):



                      Remainder of fiscal 2014     $   608.4
                      Fiscal 2015                      356.1
                      Fiscal 2016 and thereafter       347.1

                                                   $ 1,311.6

Domestic vs. International Revenue



                                            Quarter Ended June 30,
                                            2013              2012          % Change
                                                 (In millions)
   License:
   Domestic                              $      61.2       $      77.7          (21.2 )%
   International                                79.8              93.9          (15.0 )%

   Total license revenue                       141.0             171.6          (17.8 )%

   Maintenance:
   Domestic                                    161.8             154.4            4.8 %
   International                               127.5             124.4            2.5 %

   Total maintenance revenue                   289.3             278.8            3.8 %

   Professional services:
   Domestic                                     25.7              24.4            5.3 %
   International                                27.6              29.6           (6.8 )%

   Total professional services revenue          53.3              54.0           (1.3 )%

   Total domestic revenue                      248.7             256.5           (3.0 )%
   Total international revenue                 234.9             247.9           (5.2 )%

   Total revenue                         $     483.6       $     504.4           (4.1 )%

We estimate that foreign currency exchange rate fluctuations caused an approximate $2 million decrease in our international revenue for the quarter ended June 30, 2013 as compared to the prior year quarter.

Domestic License Revenue

Domestic license revenue was $61.2 million, or 43.4%, and $77.7 million, or 45.3%, of our total license revenue for the quarters ended June 30, 2013 and 2012, respectively. Domestic license revenue for the quarter ended June 30, 2013 decreased by $16.5 million, or 21.2%, from the prior year quarter, due to a $13.4 million decrease in ESM license revenue and a $3.1 million decrease in MSM license revenue.

International License Revenue

International license revenue was $79.8 million, or 56.6%, and $93.9 million, or 54.7%, of our total license revenue for the quarters ended June 30, 2013 and 2012, respectively.

International license revenue for the quarter ended June 30, 2013 decreased by $14.1 million, or 15.0%, from the prior year quarter, due to an $11.7 million decrease in ESM license revenue and a $2.4 million decrease in MSM license revenue. The ESM license revenue decrease was attributable to decreases of $7.7 million, $2.7 million and $2.3 million in our Europe, Middle East and Africa (EMEA), Canada and Asia Pacific markets, respectively, partially offset by an increase of $1.0 million in our Latin America market. The MSM license revenue decrease was attributable to a $1.3 million decrease in our EMEA market and a combined decrease of $1.1 million in our other international markets.


Table of Contents

Domestic Maintenance Revenue

Domestic maintenance revenue was $161.8 million, or 55.9%, and $154.4 million, or 55.4%, of our total maintenance revenue for the quarters ended June 30, 2013 and 2012, respectively. Domestic maintenance revenue for the quarter ended June 30, 2013 increased by $7.4 million, or 4.8%, over the prior year quarter, due to a $6.6 million increase in ESM maintenance revenue and a $0.8 million increase in MSM maintenance revenue.

International Maintenance Revenue

International maintenance revenue was $127.5 million, or 44.1%, and $124.4 million, or 44.6%, of our total maintenance revenue for the quarters ended June 30, 2013 and 2012, respectively.

International maintenance revenue for the quarter ended June 30, 2013 increased by $3.1 million, or 2.5%, over the prior year quarter, due to a $2.3 million increase in ESM maintenance revenue and a $0.8 million increase in MSM maintenance revenue. The ESM maintenance revenue increase was attributable primarily to an increase of $1.5 million in our EMEA market.

Professional Services Revenue

Professional services revenue for the quarter ended June 30, 2013 decreased slightly, which is reflective of a $2.0 million, or 6.8%, decrease in international professional services revenue, partially offset by a $1.3 million, or 5.3%, increase in domestic professional services revenue. This decrease was attributable primarily to decreases in implementation and consulting revenue, partially offset by an increase in education services revenue period over period.

Operating Expenses



                                                  Quarter Ended
                                                    June 30,
                                                2013        2012        % Change
                                                  (In millions)
       Cost of license revenue                 $  40.1     $  39.2            2.3 %
       Cost of maintenance revenue                51.5        50.9            1.2 %
       Cost of professional services revenue      49.2        57.7          (14.7 )%
       Selling and marketing expenses            146.5       164.9          (11.2 )%
       Research and development expenses          43.0        42.2            1.9 %
       General and administrative expenses        73.3        63.0           16.3 %
       Amortization of intangible assets          10.3        12.6          (18.3 )%
. . .
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