<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File No. 1-14196
STERLING COMMERCE, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2623341
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 Crescent Court, Suite 1200
Dallas, Texas 75201
(Address of principal executive offices, including zip code)
(214) 981-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of July 30, 1999, 88,319,219 shares of the Company's Common Stock, $.01 par
value, were outstanding.
<PAGE>
STERLING COMMERCE, INC.
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Page
----
Sterling Commerce, Inc. Consolidated Balance Sheets at
June 30, 1999 and September 30, 1998................................ 3
Sterling Commerce, Inc. Consolidated Statements of Income for
the Three and Nine Months Ended June 30, 1999 and 1998.............. 4
Sterling Commerce, Inc. Consolidated Statement of Stockholders'
Equity for the Nine Months Ended June 30, 1999...................... 5
Sterling Commerce, Inc. Consolidated Statements of Cash Flows
for the Nine Months Ended June 30, 1999 and 1998.................... 6
Sterling Commerce, Inc. Notes to Consolidated Financial Statements..... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 13
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.............................. 19
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<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share information)
<TABLE>
<CAPTION>
A S S E T S
June 30, September 30,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 325,382 $ 354,948
Marketable securities........................................................ 303,295 183,451
Accounts and notes receivable, net........................................... 164,848 151,256
Deferred income taxes........................................................ 7,729 11,627
Prepaid expenses and other current assets.................................... 26,042 15,869
------------- -------------
Total current assets.................................................. 827,296 717,151
Property and equipment, net of accumulated depreciation of
$77,559 at June 30, 1999 and $57,542 at September 30, 1998................... 96,416 76,535
Computer software, net of accumulated amortization of $72,098
at June 30, 1999 and $62,257 at September 30, 1998........................... 96,837 91,409
Excess cost over net assets acquired, net of accumulated
amortization of $10,633 at June 30, 1999 and $2,339 at
September 30, 1998........................................................... 59,277 63,382
Other assets................................................................... 31,840 18,527
------------- -------------
$ 1,111,666 $ 967,004
============= =============
L I A B I L I T I E S A N D S T O C K H O L D E R S ' E Q U I T Y
Current liabilities:
Accounts payable and accrued liabilities..................................... $ 66,525 $ 90,599
Income taxes payable......................................................... 8,036 7,992
Deferred revenue............................................................. 83,660 71,744
------------- -------------
Total current liabilities............................................. 158,221 170,335
------------- -------------
Deferred income taxes........................................................ 44,589 30,335
Other noncurrent liabilities................................................. 22,777 18,419
Stockholders' equity:
Preferred stock, $.01 par value; 50,000 shares authorized;
no shares issued and outstanding...........................................
Common stock, $.01 par value; 300,000 and 150,000 shares
authorized at June 30, 1999 and September 30, 1998,
respectively; 96,044 and 94,511 shares issued at June 30,
1999 and September 30, 1998, respectively.................................. 960 945
Additional paid-in capital................................................... 760,568 714,156
Retained earnings............................................................ 133,270 31,756
Accumulated other comprehensive income (loss)................................ (3,158) 1,058
Treasury stock, at cost; 193 shares at June 30, 1999......................... (5,561)
------------- -------------
Total stockholders' equity............................................ 886,079 747,915
------------- -------------
$ 1,111,666 $ 967,004
============= =============
</TABLE>
See accompanying notes.
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<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share information)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenue:
<S> <C> <C> <C> <C>
Products............................................. $ 53,758 $ 47,370 $ 161,303 $ 124,230
Product support...................................... 36,629 24,802 106,053 70,564
Services............................................. 61,804 49,923 178,229 144,660
---------- ---------- ---------- ----------
152,191 122,095 445,585 339,454
Costs and expenses:
Costs of sales:
Products and product support....................... 15,271 10,402 45,349 29,330
Services........................................... 18,056 13,697 49,911 39,261
---------- ---------- ---------- ----------
33,327 24,099 95,260 68,591
Product development and enhancement expenses......... 8,781 7,343 27,598 21,383
Selling, general and administrative expenses......... 62,330 47,666 181,769 138,032
Reorganization and unusual costs..................... (2,450) (2,450)
---------- ---------- ---------- ----------
101,988 79,108 302,177 228,006
---------- ---------- ---------- ----------
Income before other income and income taxes............... 50,203 42,987 143,408 111,448
Other income.............................................. 6,513 6,254 19,250 18,173
---------- ---------- ---------- ----------
Income before income taxes................................ 56,716 49,241 162,658 129,621
Provision for income taxes................................ 19,759 18,015 58,595 47,217
---------- ---------- ---------- ----------
Net income................................................ $ 36,957 $ 31,226 $ 104,063 $ 82,404
========== ========== ========== ==========
Earnings per common share:
Basic................................................ $ 0.39 $ 0.34 $ 1.09 $ 0.91
========== ========== ========== ==========
Diluted.............................................. $ 0.38 $ 0.33 $ 1.06 $ 0.87
========== ========== ========== ==========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended June 30, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Additional Comprehensive Treasury Stock Total
--------------- Paid-in Retained Income -------------- Stockholders'
Shares Amount Capital Earnings (Loss) Shares Amount Equity
------ ------ --------- -------- ------------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998........... 94,511 $ 945 $ 714,156 $ 31,756 $ 1,058 $ 747,915
Net income.............................. 104,063 104,063
Foreign currency translation............
adjustment............................ (3,708) (3,708)
Unrealized loss on marketable
securities............................ (508) (508)
-------------
Comprehensive income.................... 99,847
-------------
Issuance of common stock
pursuant to employee stock
plans, including tax
benefit of $7,736..................... 1,533 15 46,412 (2,549) 597 $ 17,243 61,121
Purchase of treasury stock.............. (790) (22,804) (22,804)
------ ------ --------- -------- ------------ ---- --------- -------------
Balance at June 30, 1999................ 96,044 $ 960 $ 760,568 $133,270 $ (3,158) (193) $ (5,561) $ 886,079
====== ====== ========= ======== ============ ==== ========= =============
</TABLE>
See accompanying notes.
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<PAGE>
STERLING COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended June 30,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating activities:
Net income....................................................................... $ 104,063 $ 82,404
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................................. 42,292 30,291
Provision for losses on accounts receivable................................ 2,263 1,769
Provision for deferred income taxes........................................ 18,152 4,842
Changes in operating assets and liabilities, net of effects of
business acquisitions:
Accounts and notes receivable.......................................... (15,446) (27,788)
Prepaid expenses and other assets...................................... (25,069) (17,266)
Accounts payable, accrued liabilities and income
taxes payable........................................................ (24,237) 5,063
Deferred revenue....................................................... 11,718 5,607
Other.................................................................. 9,917 4,135
---------- ----------
Net cash provided by operating activities............................ 123,653 89,057
---------- ----------
Investing activities:
Purchases of property and equipment.............................................. (46,835) (38,556)
Purchases and capitalized cost of development of computer software............... (19,806) (14,825)
Purchases of investments......................................................... (309,000) (170,890)
Sales of investments............................................................. 188,648 169,919
Business acquisitions, net of cash acquired...................................... (4,544) (3,711)
---------- ----------
Net cash used in investing activities................................ (191,537) (58,063)
---------- ----------
Financing activities:
Issuance of common stock......................................................... 61,122 57,253
Purchase of treasury stock....................................................... (22,804)
---------- ----------
Net cash provided by financing activities............................ 38,318 57,253
---------- ----------
Increase (decrease) in cash and cash equivalents................................... (29,566) 88,247
Cash and cash equivalents at beginning of period................................... 354,948 250,348
---------- ----------
Cash and cash equivalents at end of period......................................... $ 325,382 $ 338,595
========== ==========
</TABLE>
See accompanying notes.
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<PAGE>
STERLING COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Sterling
Commerce, Inc. and its subsidiaries (collectively, the "Company") after
elimination of all significant intercompany balances and transactions. Certain
amounts for the comparative periods have been reclassified to conform to the
current year presentation. The financial statements have been prepared in
conformity with generally accepted accounting principles for interim financial
statements, which require management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
While management has based its assumptions and estimates on facts and
circumstances currently known, actual amounts may differ from such estimates.
The information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis and financial statements and notes thereto
included in the Sterling Commerce, Inc. 1998 Annual Report on Form 10-K.
The interim consolidated financial information contained herein is
unaudited but, in the opinion of management, includes all adjustments
(consisting only of normal, recurring entries) necessary for a fair presentation
of the financial position, results of operations and cash flows for the periods
presented. Results of operations for the periods presented herein are not
necessarily indicative of results of operations for the entire year.
Revenue Recognition
In accordance with Statement of Position 97-2 "Software Revenue
Recognition," as amended by Statement of Position 98-4 "Deferral of the
Effective Date of Certain Provisions of SOP 97-2" ("SOP 97-2"), revenue from
license fees for software products is recognized when the software is delivered,
when there is persuasive evidence that an arrangement exists, when the fee is
fixed and determinable and when collection is probable. If software products
transactions include the right to receive future products, a portion of the
software products revenue is deferred and recognized when such products are
delivered. Revenue from services is recognized as the services are performed.
Product support contracts generally entitle the customer to telephone
support, "bug fixing" and the right to receive software updates as they are
released. Revenue from product support contracts, including product support
included in initial license fees, is recognized ratably over the contract
period. All significant costs and expenses associated with product support
contracts are expensed as incurred, which approximates ratable expenses over the
contract period.
When products, product support and services are billed prior to the time
the related revenue is recognized, deferred revenue is recorded and related
costs paid in advance are deferred.
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<PAGE>
Earnings Per Common Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------------ ---------------------------
1999 1998 1999 1998
---------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Basic:
Net income.................................. $ 36,957 $ 31,266 $ 104,063 $ 82,404
================ =========== ============ ===========
Weighted average common shares outstanding.. 95,588 91,370 95,312 90,495
================ =========== ============ ===========
Per share amount............................ $ 0.39 $ 0.34 $ 1.09 $ 0.91
================ =========== ============ ===========
Diluted:
Net income.................................. $ 36,957 $ 31,266 $ 104,063 $ 82,404
================ =========== ============ ===========
Weighted average common shares outstanding.. 95,588 91,370 95,312 90,495
Net effect of dilutive options (1).......... 2,718 4,135 2,698 3,897
---------------- ----------- ------------ -----------
Total....................................... 98,306 95,505 98,010 94,392
================ =========== ============ ===========
Per share amount............................ $ 0.38 $ 0.33 $ 1.06 $ 0.87
================ =========== ============ ===========
</TABLE>
__________
(1) For the three and nine months ended June 30, 1999, respectively,
approximately 1.0 million and 1.2 million, antidilutive stock options were
excluded from the computation of diluted earnings per share. For the three and
nine months ended June 30, 1998, there were no significant antidilutive stock
options.
Recent Accounting Pronouncements
Effective October 1, 1998, the Company adopted SOP 97-2, which requires
each element of a software license arrangement to be separately identified and
accounted for based on the relative fair value of each element. Revenue cannot
be recognized on any element of the license arrangement if undelivered elements
are essential to the functionality of the delivered elements. Adoption of SOP
97-2, did not significantly affect the Company's results of operations for the
three and nine months ended June 30, 1999, nor is it expected to have a
significant impact on results for the remainder of the year since the Company's
revenue recognition policies have historically been in substantial compliance
with the practices required by SOP 97-2.
On December 15, 1998, Statement of Position 98-9, "Modification of SOP
97-2, "Software Revenue Recognition," with Respect to Certain Transactions"
("SOP 98-9") became effective. SOP 98-9 amends SOP 97-2 to require that an
entity recognize revenue for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence ("VSOE")
of the fair values of all the undelivered elements that are not accounted for by
means of long-term contract accounting, (2) VSOE of fair value does not exist
for one or more of the delivered elements and (3) all revenue recognition
criteria of SOP 97-2 (other than the requirement for VSOE of the fair value of
each delivered element) are satisfied. VSOE is determined by the price charged
when each item is sold separately, or by deducting the fair value of one or more
items from the total fair value of the agreement or by using objective evidence
based upon the vendor's facts and circumstances.
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<PAGE>
The residual method requires revenue for multiple element arrangements to
be recognized as follows: (1) the total fair value of the undelivered elements,
as indicated by VSOE, is deferred and subsequently recognized in accordance with
SOP 97-2 and (2) the difference between the total arrangement fee and the amount
deferred for the undelivered elements is recognized as revenue related to the
delivered elements.
The provisions of SOP 98-9 extend the deferral of certain passages of SOP
97-2. All other provisions of SOP 98-9 will be effective for transactions that
are entered into in fiscal years beginning after March 15, 1999. Retroactive
application is prohibited. The Company is currently evaluating the requirements
of SOP 98-9 and the effects, if any, it may have on the Company's current
revenue recognition policies.
2. General Information
The Company is a leading provider of electronic commerce ("EC") products,
services and solutions worldwide. Sterling Commerce is recognized as the
worldwide leader in providing Internet EC solutions for the Global 5000 and
their commerce communities. The Company develops, markets and supports EC
software products, and provides EC services, that enable businesses to engage in
business-to-business electronic communications and transactions. The Company is
focused on providing EC solutions through its COMMERCE, CONNECT and GENTRAN
product and service families to address extranet management, business process
integration, community management, infrastructure and outsourcing. The Company
provides solutions for remote and mobile systems management through its CONNECT:
Manage and CONNECT: Remote product lines. The Company provides bank automation
solutions to financial institutions through its VECTOR product family. Sterling
Commerce, Inc. was incorporated in December 1995. The Company, through its
predecessors and subsidiaries, has been providing EC solutions for over 25 years
and has more than 45,000 customers in many industries, including banking,
healthcare, manufacturing, pharmaceuticals, retailing, telecommunications and
transportation.
3. Comprehensive Income
On October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130
requires the presentation of comprehensive income and its components in a full
set of general-purpose financial statements. The purpose of reporting
comprehensive income is to report changes in equity that result from
transactions and other economic events, excluding transactions with owners in
their capacity as owners. The Company's comprehensive income consists of net
income, foreign currency translation adjustments and unrealized gain or loss on
marketable securities; however, the adoption of FAS 130 had no impact on the
financial position or results of operations of the Company.
-9-
<PAGE>
Comprehensive income for the three and nine months ended June 30, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
------------------ ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Net income.................................. $ 36,957 $ 31,226 $ 104,063 $ 82,404
Foreign currency translation adjustment..... (1,256) 1,026 (3,708) 1,420
Unrealized loss on marketable securities,
net of tax................................ (477) (334) (508) (224)
------------------ ------------- ------------------ -------------
Comprehensive income........................ $ 35,224 $ 31,918 $ 99,847 $ 83,600
================== ============= ================== =============
</TABLE>
4. 1998 Business Combinations and Reorganizations
Reorganization and Unusual Costs
During the quarter ended September 30, 1998, the Company made a decision to
exit the business of publishing CD-ROM based catalogs and accordingly wrote off
certain assets and recorded certain liabilities associated with exiting this
business. The costs associated with exiting this business and other estimated
charges were, and are expected to remain, less than the Company originally
estimated, resulting in a reversal during the quarter ended June 30, 1999, of
$5.5 million of the costs originally reserved for this purpose. Additionally,
during the quarter ended June 30, 1999, the Company decided to relocate
operations from a facility which it currently leases to a new leased facility.
The Company is required to continue its operating lease payments and will write-
off leasehold improvements for the original facility. The Company has recorded
an additional charge of $3.0 million for these costs in the quarter ended June
30, 1999.
During the first nine months of fiscal 1999, approximately $14.2 million,
including approximately $2.7 million of employee termination costs, were
disbursed or reversed from the September 30, 1998 balance of accrued
reorganization and unusual costs. The balance remaining in accrued
reorganization and unusual costs at June 30, 1999 was approximately $7.7
million, which is classified as accounts payable and accrued liabilities and is
primarily related to lease termination, employee severance and legal
obligations.
Research and Development Costs
In its acquisition of XcelleNet, Inc. ("XcelleNet"), completed July 21,
1998, the Company acquired certain in-process research and development. The
Company had estimated at September 30, 1998 that further expenditures of
approximately $8.5 million would be required during the succeeding 18 months to
develop the acquired research and development into commercially viable products.
Due to changes in business priorities, some projects that were originally
planned to use the in-process research and development have been cancelled.
Therefore, the above mentioned estimate has been reduced to $6.2 million. The
remaining development is planned to be completed within the original 18 months.
As of June 30, 1999, the Company has expended approximately $4.7 million
relating to these development efforts.
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<PAGE>
5. 1999 Business Realignment
Based in part on the final results of the third quarter, the Company has
determined that a realignment of resources, including an exiting of certain
businesses and discontinuance of certain product lines, is necessary to maximize
future operating results, growth and shareholder value.
Approximately 200 positions are being eliminated from the Company's current
global workforce, and the Company will incur severance and other costs
associated with the exiting of certain businesses and the discontinuance of
certain product lines. Although the Company's management is still in the process
of evaluating the entire nature, scope and extent of these exit plans, it
currently estimates that the related charges, to be recognized in the Company's
fiscal fourth quarter, will be in the range of $25 million to $30 million,
primarily related to employee severance, excess facilities and other costs and
expenses.
The Company has begun a program of realigning its resources to new
initiatives to address what it believes are future growth areas: extranet
management, business process integration, community management, infrastructure
and outsourcing. As a result of the realigning of efforts, during the fourth
quarter of fiscal 1999, the Company plans to reassign approximately 450
employees to the new initiatives. Additionally, subsequent to the end of fiscal
1999, the Company plans to reassign an additional 300 people and invest $75
million to $100 million in the new initiatives.
In addition, the Company has also determined that the product lines
acquired in the XcelleNet acquisition are not sufficiently strategic. Therefore,
subsequent to June 30, 1999, the Company decided to sell the XcelleNet business.
The Company's management is unable at this time to reasonably estimate any costs
or gain or loss associated with the disposition of this business.
6. Stockholders' Equity
Common Stock
At the Company's Annual Meeting of Stockholders held on March 4, 1999, the
stockholders of the Company approved an amendment to the Company's Certificate
of Incorporation which increased the number of shares of Common Stock,
authorized for issuance from 150 million shares to 300 million shares.
Preferred Stock
The Company is authorized to issue up to 50 million shares of preferred
stock, par value $.01 per share ("Preferred Stock"). On March 4, 1999, pursuant
to the terms of the Rights Agreement, dated as of December 18, 1996, the Board
of Directors of the Company designated an additional 1.5 million shares of
Preferred Stock as Series A Junior Participating Preferred Stock ("Series A
Junior Preferred Stock"). At June 30, 1999, 3 million shares of Series A Junior
Preferred Stock were authorized to be issued.
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<PAGE>
Treasury Stock
On March 1, 1999, the Company's Board of Directors approved a stock
repurchase program which authorized the repurchase of up to 5 million shares the
Company's Common Stock. On July 9, 1999, the Company's Board of Directors
approved an increase in the number of shares of Common Stock authorized to be
repurchased pursuant to the stock repurchase program from 5 million shares to 15
million shares. Purchases may be made in open market, negotiated or block
transactions from time to time as market and business conditions warrant. As of
June 30, 1999, the Company had purchased approximately 0.8 million shares of
Common Stock at an average price of $28.87 per share. As of July 30, 1999, the
Company has made additional purchases of approximately 8.5 million shares of
Common Stock at an average price of $27.49.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended June 30, 1999 and 1998
Total revenue increased $30.1 million or 25% in the third quarter of fiscal
1999 compared to the same period in fiscal 1998. Products revenue increased
$6.4 million or 13%, product support revenue increased $11.8 million or 48% and
services revenue increased $11.9 million or 24%. The increase in products and
product support revenues was due primarily to increased licensing of CONNECT
software products, including remote and mobile management software products and
related product support not offered by the Company during the same period of
fiscal 1998. The increase in services revenue was primarily due to growth in
Managed Services and COMMERCE services customer volume, the addition of new
customers and price increases.
The Company's products revenue growth rate for the current periods reported
herein is lower, as compared to previous growth rates, primarily due to delays
in the closing of certain expected quarter-end transactions, a slowdown in
product licensing as a result of customers delaying new licensing decisions
until their internal Y2K issues are addressed, and lower than expected growth
from certain of the Company's more traditional EDI and file transfer products
due to the maturity of these segments combined with the penetration of the
Company's products in these segements. The Company expects the dampening effects
of Y2K on products revenue to continue through the end of the current fiscal
year, and possibly extending into the second quarter of fiscal year 2000. The
Company has continued a marketing campaign to provide services specific to Y2K
consulting and testing for customers and their trading communities. The results
of this campaign have contributed to the increase in the Company's services
revenue, but these Y2K specific services were not sufficient to offset the lower
growth trend in products revenue as affected by Y2K.
The Company's recurring revenue includes revenue from annual and multi-year
product support agreements having terms ranging generally from one to three
years, fixed-term product license agreements having terms ranging generally from
month-to-month to year-to-year and COMMERCE services agreements that are
cancelable upon 30 days' notice. The Company includes the entire portion of the
recognized revenue from COMMERCE services agreements in recurring revenue,
although no assurances can be given that such agreements will not be canceled.
Recurring revenue increased $17.0 million or 27% in the third quarter of fiscal
1999 compared to the same period of fiscal 1998 and represented 52% of total
revenue in the third quarter of fiscal 1999 compared to 51% in the same period
of fiscal 1998.
Internet-related revenue is revenue derived primarily from products and
services in the CONNECT, GENTRAN and COMMERCE families that are implemented
directly on the Internet or used with Internet-based technologies, including
extranet and intranet configurations. Examples include Web-based EC message
management software, software for the movement and management of information
over extranets and intranets, management of business communities over extranets
and related consulting services. The Company's Internet-related revenues
increased 49% to $49.9 million for the third quarter of fiscal 1999 from $33.5
million for the same period of fiscal 1998. For the three months ended June 30,
1999, 65% of the Company's products revenue was derived from products designed
for operating platforms other
-13-
<PAGE>
than mainframe operating platforms, compared to 56% for the three months ended
June 30, 1998. The Company's revenue from sources outside the United States
represented 23% of total revenue in the third quarter of fiscal 1999, compared
to 20% in the third quarter of fiscal 1998.
Total costs and expenses for the three months ended June 30, 1999 increased
$22.9 million or 29% (including a net benefit of $2.5 million of reorganization
and unusual costs as described below) on revenue growth of 25% when compared to
the three months ended June 30, 1998. Excluding the $2.5 million net benefit,
total costs and expenses increased $25.3 million or 32%. The increase in total
costs and expenses is due to a 31% increase in selling, general and
administrative expenses, a 38% increase in costs of sales and a 20% increase in
product development and enhancement expenses.
During the quarter ended September 30, 1998, the Company made a decision to
exit the business of publishing CD-ROM based catalogs and accordingly wrote off
certain assets and recorded certain liabilities associated with exiting this
business. The costs associated with exiting this business and other estimated
charges were, and are expected to remain, less than the Company originally
estimated, resulting in a reversal during the quarter ended June 30, 1999, of
$5.5 million of the costs originally reserved for this purpose. Additionally,
during the quarter ended June 30, 1999, the Company decided to relocate
operations from a facility which it currently leases to a new leased facility.
The Company is required to continue its operating lease payments and will write-
off leasehold improvements for the original facility. The Company has recorded
an additional charge of $3.0 million for these costs in the quarter ended June
30, 1999.
Total costs of sales increased $9.2 million or 38% when compared with the
same period of fiscal 1998. As a percentage of total revenue, total costs of
sales increased to 22% in the third quarter of fiscal 1999 from 20% for the same
period of fiscal 1998. Costs of sales for products and product support increased
$4.9 million or 47% due to an increase of $3.2 million related to costs
associated with supporting expanding software licensing activities and an
increase of $1.7 million related to serving a larger installed customer base.
The above mentioned increase in costs of sales for products and product support
includes an increase of $3.1 million of amortization costs for software
products. Costs of sales for products and product support as a percentage of
revenue increased to 10% in the third quarter of fiscal 1999 from 9% in the same
period of fiscal 1998. Costs of sales for services increased $4.4 million or 32%
primarily due to growth in Managed Services and increased costs to support a
growing customer base and greater customer volume. As a percentage of total
revenue, costs of sales for services increased to 12% for the third quarter of
fiscal 1999 compared to 11% for the third quarter of fiscal 1998. Costs of sales
includes $9.5 million of depreciation and amortization for the third quarter of
fiscal 1999 compared to $7.9 million of depreciation and amortization for the
same period of fiscal 1998.
Product development and enhancement expenses for the third quarter of
fiscal 1999 increased $1.4 million or 20% to $8.8 million, net of $6.8 million
capitalized pursuant to Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("FAS 86"), from $7.3 million, net of $4.4 million capitalized, for
the third quarter of fiscal 1998. This increase was primarily due to the higher
gross product development and enhancement expenses relating to products under
development during the third quarter of fiscal 1999. As a percentage of total
revenue, product development and enhancement expenses remained unchanged at 6%
for the third quarter of fiscal 1999 compared to the third quarter of fiscal
1998. Total capitalized costs represented 44% and 37% of
-14-
<PAGE>
total product and enhancement expenses for the quarter ended June 30, 1999 and
1998, respectively. Product development and enhancement expenses and the
capitalization rate may fluctuate from period to period depending in part upon
the number and status of software development projects in process.
Selling, general and administrative expenses increased $14.7 million or 31%
when compared with the same period of fiscal 1998, primarily due to an increase
in sales, marketing and administrative support activities needed to support the
corresponding growth in revenue. Selling, general and administrative expenses,
as a percentage of total revenue, were 41% and 39% for the third quarter of
fiscal 1999 and fiscal 1998, respectively.
Income before other income and income taxes was $50.2 million for the third
quarter of fiscal 1999 compared to $43.0 million for the same period of fiscal
1998. The increase was primarily due to a $30.1 million increase in revenue
offset by a $22.9 million increase in total costs and expenses. Excluding the
net benefit of $2.5 million related to reorganization and unusual costs, income
before other income and income taxes was $47.8 million for the third quarter of
fiscal 1999.
Provision for income taxes increased $1.7 million for the third quarter of
fiscal 1999 compared to the same period of fiscal 1998, primarily due to the
increase in income before income taxes in the third quarter of fiscal 1999. The
effective tax rate for the three months ended June 30, 1999 and 1998 was 34.8%
and 36.6%, respectively. The change in the effective tax rate was primarily due
to favorable tax accrual adjustments relating to an IRS audit, for which the
field examination was completed during the quarter ended June 30, 1999.
Nine Months Ended June 30, 1999 and 1998
Total revenue increased $106.1 million or 31% for the nine months ended
June 30, 1999 compared to the same period in fiscal 1998. Products revenue
increased $37.1 million or 30%, product support revenue increased $35.5 million
or 50% and services revenue increased $33.6 million or 23%. The increase in
products and product support revenues was due primarily to increased licensing
of CONNECT and GENTRAN software products, including remote and mobile management
software products and related product support not offered by the Company during
the same period of fiscal 1998. The increase in services revenue was primarily
due to growth in Managed Services and COMMERCE services customer volume, the
addition of new customers and price increases.
Recurring revenue increased $52.8 million or 29% in the first nine months
of fiscal 1999 compared to the same period of fiscal 1998 and represented 52% of
total revenue compared to 53% for the same period of fiscal 1998. Internet-
related revenues increased 54% to $141.8 million for the nine months ended June
30, 1999 from $91.9 million for the same period of fiscal 1998. For the nine
months ended June 30, 1999, 66% of the Company's products revenue was derived
from products designed for operating platforms other than mainframe operating
platforms, compared to 57% for the nine months ended June 30, 1998. The
Company's revenue from outside the United States represented 23% of total
revenue in the first nine months of fiscal 1999, compared to 20% in the first
nine months of fiscal 1998.
Total costs and expenses for the nine months ended June 30, 1999 increased
$74.2 million or 33% (including a net benefit of $2.5 million of reorganization
and unusual costs as described
-15-
<PAGE>
above) on revenue growth of 31% when compared to the nine months ended June 30,
1998. Excluding the $2.5 million net benefit, total costs and expenses increased
$76.6 million or 34%. The increase in total costs and expenses is due to a 32%
increase in selling, general and administrative expenses, a 39% increase in
costs of sales and a 29% increase in product development and enhancement
expenses.
Total costs of sales increased $26.7 million or 39% when compared with the
same period of fiscal 1998. As a percentage of total revenue, total costs of
sales increased to 21% for the nine months ended June 30, 1999 from 20% for the
same period of fiscal 1998. Costs of sales for products and product support
increased $16.0 million or 55% due to an increase of $11.2 million related to
costs associated with supporting expanding software licensing activities and an
increase of $4.8 million related to serving a larger installed customer base.
The above mentioned increase in costs of sales for products and product support
includes an increase of $9.7 million of amortization costs for software
products. Costs of sales for products and product support as a percentage of
revenue increased to 10% for the nine months ended June 30, 1999 from 9% in the
same period of fiscal 1998. Costs of sales for services increased $10.7 million
or 27% primarily due to growth in Managed Services and increased costs to
support a growing customer base and greater customer volume. As a percentage of
total revenue, costs of sales for services decreased to 11% for the first nine
months of fiscal 1999 compared to 12% for the first nine months of fiscal 1998.
Costs of sales includes $28.1 million of depreciation and amortization for the
first nine months of fiscal 1999 compared to $21.6 million of depreciation and
amortization for the same period of fiscal 1998.
Product development and enhancement expenses for the nine months ended June
30, 1999 increased $6.2 million or 29% to $27.6 million, net of $18.6 million
capitalized pursuant to FAS 86, from $21.4 million, net of $12.5 million
capitalized, for the nine months ended June 30, 1998. The increase was
primarily due to the higher gross product development and enhancement expenses
relating to products under development during fiscal 1999. As a percentage of
total revenue, product development and enhancement expenses remained unchanged
at 6% for the first nine months of fiscal 1999 and 1998. Total capitalized
costs represented 40% and 37% of total product and enhancement expenses for the
nine months ended June 30, 1999 and 1998, respectively. Product development and
enhancement expenses and the capitalization rate may fluctuate from period to
period depending in part upon the number and status of software development
projects in process.
Selling, general and administrative expenses increased $43.7 million or 32%
for the nine months ended June 30, 1999, when compared with the same period of
fiscal 1998 due primarily to an increase in sales, marketing and administrative
support activities needed to support the corresponding growth in revenue.
Selling, general and administrative expenses remained unchanged as a percentage
of total revenue at 41% compared to the same period of fiscal 1998.
Income before other income and income taxes was $143.4 million for the nine
months ended June 30, 1999, compared to $111.4 million for the same period of
fiscal 1998. The increase was primarily due to a $106.1 million increase in
revenue offset by a $74.2 million increase in total costs and expenses.
Excluding the net benefit of $2.5 million related to reorganization and unusual
costs, income before other income and income taxes was $141.0 million for the
nine months ended June 30, 1999.
-16-
<PAGE>
Provision for income taxes increased $11.4 million for the nine months
ended June 30, 1999, compared to the same period of fiscal 1998, primarily due
to the increase in income before income taxes in the nine months ended June 30,
1999. The effective tax rate for the nine months ended June 30, 1999 and 1998
was 36.0% and 36.9%, respectively. The change in the effective tax rate was
primarily due to favorable tax accrual adjustments relating to an IRS audit, for
which the field examination was completed during the quarter ended June 30,
1999.
1999 Business Realignment
Based in part on the final results of the third quarter, the Company has
determined that a realignment of resources, including an exiting of certain
businesses and discontinuance of certain product lines, is necessary to maximize
future operating results, growth and shareholder value.
Approximately 200 positions are being eliminated from the Company's current
global workforce, and the Company will incur severance and other costs
associated with the exiting of certain businesses and the discontinuance of
certain product lines. Although the Company's management is still in the process
of evaluating the entire nature, scope and extent of these exit plans, it
currently estimates that the related charges, to be recognized in the Company's
fiscal fourth quarter, will be in the range of $25 million to $30 million,
primarily related to employee severance, excess facilities and other costs and
expenses.
The Company has begun a program of realigning its resources to new
initiatives to address what it believes are future growth areas: extranet
management, business process integration, community management, infrastructure
and outsourcing. As a result of the realigning of efforts, during the fourth
quarter of fiscal 1999, the Company plans to reassign approximately 450
employees to the new initiatives. Additionally, subsequent to the end of fiscal
1999, the Company plans to reassign an additional 300 people to the new
strategic growth areas and invest $75 million to $100 million in these strategic
growth areas.
In addition, the Company has also determined that the product lines
acquired in the XcelleNet acquisition are not sufficiently strategic. Therefore,
subsequent to June 30, 1999, the Company decided to sell the XcelleNet business.
The Company's management is unable at this time to reasonably estimate any costs
or gain or loss associated with the disposition of this business.
Liquidity and Capital Resources
The Company had $669.1 million of working capital at June 30, 1999,
including $325.4 million of cash and cash equivalents and $303.3 million of
marketable securities. Days sales outstanding, measured on a quarterly basis,
increased to 97 days for the quarter ended June 30, 1999 compared with 95 days
for the quarter ended June 30, 1998, due primarily to the increase in accounts
receivable relative to the growth in revenue.
Net cash flows from operations increased $34.6 million to $123.7 million in
the first nine months of fiscal 1999 compared to the first nine months of fiscal
1998 primarily due to higher operating profits and non-cash charges, and an
increase in deferred revenue which was offset by an increase in accounts
receivable, an increase in prepaid expenses and other assets and a decrease in
accounts payable, accrued liabilities and income taxes payable. A portion of
the Company's cash flow from operations during the first nine months of fiscal
1999 and 1998 was used to fund software additions and capital expenditures.
Software expenditures during the nine months ended June 30, 1999 were $19.8
million compared to $14.8 million of software expenditures in the same period of
the prior year. The software expenditures during the current period were
primarily for new products and enhancements of existing products. Property and
equipment purchases of $46.8 million in the first nine months of fiscal 1999
were primarily for purchases of equipment upgrades for processing systems and
computer equipment purchases to support the continuing growth in revenue.
On March 1, 1999, the Company's Board of Directors approved a stock
repurchase program which authorized the repurchase of the Company's Common
Stock. On July 9, 1999 the Company's Board of Directors approved an increase in
the number of shares Common Stock authorized to be repurchased pursuant to the
stock repurchase program from 5 million shares to 15 million shares. Purchases
may be made in open market, negotiated or block transactions from time to time
as market and business conditions warrant. As of June 30, 1999, the Company had
purchased approximately 0.8 million shares of Common Stock at an average price
of $28.87 per share. As of July 30, 1999, the Company has expended $232.3
million for additional purchases of 8.5 million shares of Common Stock at an
average price of $27.49 per share. Depending on market conditions and other
business considerations, the Company plans to complete its repurchase of the 15
million shares by September 30, 1999.
The Company cancelled its Revolving Credit and Term Loan Agreement on June
30, 1999. At June 30, 1999, the Company's capital resource commitments consisted
primarily of commitments under lease arrangements for office space and
equipment. The Company presently intends to meet such obligations from cash
flows from operations. No significant commitments exist for future capital
expenditures. The Company believes available balances of cash and cash
equivalents and marketable securities, combined with cash flows from operations,
are sufficient to meet the Company's working capital requirements for the
foreseeable future.
-17-
<PAGE>
YEAR 2000
General
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. Accordingly,
computer programs that perform date-related functions may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including a
temporary inability to process transactions, send invoices or engage in similar
normal business activities. The following discussion regarding Year 2000 matters
constitutes a "Year 2000 Readiness Disclosure" within the meaning of the Year
2000 Information and Readiness Disclosure Act of 1998.
The Company has been and continues to assess and resolve Year 2000
issues associated with its product and services offerings, material internal
systems, such as information technology ("IT") systems and non-IT systems, and
material third-party relationships. The Company believes that this program will
be completed prior to December 31, 1999.
Product and Services Offerings
The Company has completed a Year 2000 assessment of its currently
offered products and services. This assessment included internal testing of the
Year 2000 capabilities of the Company's product and EC services offerings. The
Company has no plans to have its products or EC services tested by an
independent source. Based on this assessment, the Company believes that all
required steps have been taken to prepare its currently offered products and EC
services for Year 2000 compliant operation. The increased amount of testing
related to the Year 2000 resulted in some delays in the release of new products
or product versions. However, because Year 2000 compliance was generally
integrated into its normal product development activities, the Company has not
incurred any significant incremental expenses in addressing the Year 2000 issue
in its product or EC services offerings.
The Company believes that a small percentage of its customers who
receive product support from the Company are operating product versions that may
not be Year 2000 compliant or products or product versions that the Company has
replaced or intends to replace with comparable Year 2000 compliant products. The
Company believes that the majority of these customers are migrating and will
continue to migrate to Year 2000 compliant versions and products through new
releases, which the Company is strongly encouraging. In addition, certain
customers may be operating non-compliant versions of products in respect of
which the Company's agreed-upon product support and warranty periods have
expired. The Company has not undertaken an assessment of whether these customers
are taking appropriate steps to address any related Year 2000 issues.
The Company provides a significant amount of its EC services through its
data center located in Columbus, Ohio. The data center utilizes third-party
software and hardware, as well as some Company software. Furthermore, the data
center requires electricity and other utilities and relies on the Internet and
third-party communications providers for the transmission of data to and from
its customers. The Company has made provision for back-up systems and
established contingency plans. The Company has also conducted extensive
assessment and testing of the data center, including operating a back-up system
in a post year 2000 mode, and has taken appropriate remedial actions, all in an
effort to avoid Year 2000 failures.
The Company does not believe that customers who license or migrate to
Year 2000 compliant versions of its products, or customers who purchase the
Company's EC services, will experience any Year 2000 failures caused by such
products or services. In addition, the Company believes that its licenses and
other agreements contain customary and appropriate limitations on the Company's
obligations with respect to any Year 2000 failures its current or former
products and EC services may cause. However, there can be no assurance that the
Company's expectations and beliefs as to these matters will prove to be
accurate. Moreover, the Company's products are used in, and the provision of its
services requires the use of, systems comprised of third-party hardware and
software, some of which may not be Year 2000 compliant.
Internal Systems
The Company has been conducting a Year 2000 assessment of its material
internal systems, both IT and non-IT, on a risk-priority basis. That assessment,
which included an assessment of certain embedded systems, is complete. Based on
the results of that assessment, the Company has taken certain remedial action
with respect to its internal systems. The remediation effort for these systems
was completed in June 1999. Any newly discovered remediation requirements will
be addressed by December 31, 1999. Based upon its experience to-date, the
Company does not anticipate that the internal and external costs of such
remediation will have a material adverse effect on the Company.
There can be no assurance that the remediation of the Company's material
internal systems will be completed in a timely manner or that such remediated
systems will function as anticipated. Interruption of normal business
operations, including the Company's ability to effectively provide EC services
to customers, in such events could have a material adverse effect on the
Company's business, operating results and financial condition.
Third-Party Relationships
The Company has conducted a Year 2000 assessment of its material third
party supplier relationships. The assessment was conducted through
communications with such suppliers, testing of supplier equipment, systems or
interfaces, and a review of the Year 2000 information made publicly available by
such suppliers. As a result of this assessment, certain actions were taken by
the Company to obtain assurances as to the correct future operation of third
party systems. The assessment and remediation plan has been completed and
executed. There can be no assurance, however, that the Company has received all
information necessary to fully evaluate the Year 2000 readiness of all material
suppliers. Moreover, the Company relies in various ways, both domestically and
internationally, on government, utility and communications service providers to
conduct normal business operations. There can be no assurance that such
suppliers will not suffer business interruptions caused by a Year 2000 issue.
Such interruptions could have a material adverse effect on the Company's
business, operating results and financial condition.
Additional Risks
Additional aspects of the Year 2000 issue may pose risks to be
considered in evaluating the future growth of the Company. The Company believes
that it has experienced lower than expected growth from certain products, in
part, as a result of customers' internal Year 2000 issues. There can be no
assurance that Year 2000 issues will not continue to affect future customer
purchasing patterns possibly resulting in slower growth for certain products and
services offered by the Company. Furthermore, some commentators have also
predicted that a significant amount of litigation may arise out of Year 2000
compliance issues. While the Company has not been subject to any Year 2000
claims or lawsuits to date, there can be no assurance that customers or former
customers will not bring claims or lawsuits against the Company seeking
compensation for losses associated with Year 2000-related failures. A material
adverse outcome in a Year 2000 claim or lawsuit could have a material adverse
effect on the Company's business, financial condition and results of operations.
Contingency Planning
Although the Company believes that it is currently executing a timely,
effective plan for addressing material Year 2000 issues that may affect the
Company, there can be no assurance that the Company or a third party on which
the Company significantly relies will not experience unanticipated consequences
or material expenses which could have a material adverse effect on the Company's
business, operating results or financial condition. The Company believes that it
is difficult to specifically describe its most likely "worst case" Year 2000
scenario. One "worst case" scenario is the failure of the Company's products to
correctly perform date-related functions through the year 2000, causing customer
systems or operations dependent upon such products or services to fail or be
disrupted. Other "worst case" scenarios involve the Company's EC services
offerings. Failure of the Company's internal systems to correctly perform date-
related functions through the year 2000, or disruptions in those systems, could
result in errors or delays in the provision of the Company's EC services.
Another "worst case" Year 2000 scenario is the failure of a material third-party
supplier, such as a communications or utility provider, to address its Year 2000
issues, resulting in errors or delays in the provision of the Company's EC
services. In the event of such failures or disruptions, customers may commence
legal action against the Company or otherwise seek compensation for their
losses.
The Company is establishing a set of "contingency plans" to address
potential consequences of the Year 2000 issue. These plans include documented
action to take in the event any outage, a response chain-of-command to be used
in managing any outage, and the reporting that is required. The Company intends
to continue to evaluate both existing and newly identified Year 2000 risks and
to develop and implement such further responsive measures as it deems
appropriate.
Other Matters
Demand for many of the Company's products and services tends to improve
with increased inflation as customers strive to increase employee productivity
and reduce costs. However, the effect of inflation on the Company's relatively
labor-intensive cost structure could adversely affect its results of operations
to the extent the Company is not able to recover increased operating costs
through increased prices and sales.
The assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at exchange rates in effect as of the respective
balance sheet dates, and revenue and expense accounts of these operations are
translated at average exchange rates during the month in which the underlying
transaction occurs. Unrealized translation gains and losses are included as an
adjustment to retained earnings. The Company has mitigated a portion of its
currency exposure through decentralized sales, marketing and support operations
in which all costs are local currency based. In addition, the Company may from
time to time employ external hedging strategies. The Company believes that its
results of operations and financial position will not be materially affected by
the recent decrease in the relative value of certain foreign currencies compared
to the U.S. dollar.
The Company maintains a strategy of seeking to acquire businesses and
products to fill strategic market niches. This acquisition strategy contributes
in part to the Company's growth in revenue and operating profit. The impact of
any future acquisitions on continued growth in revenue and operating profit
cannot presently be determined.
Forward-Looking Information
This report and other reports and statements published by the Company
from time to time (collectively, "Published Reports") contain, or may contain,
certain forward-looking statements and information that are based on the beliefs
of, and information currently available to, the Company's management, as well as
estimates and assumptions made by the Company's management. When used in
Published Reports, words such as "anticipate," "believe," "estimate," "expect,"
"future," "intend," "plan" and similar expressions, as they relate to the
Company or the Company's management, identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions relating
to the Company's operations and results of operations, competitive factors and
pricing pressures, shifts in market demand, the performance and needs of the
industries served by the Company, the costs of product development and other
risks and uncertainties, including, in addition to any risks and uncertainties
specifically identified in the text surrounding such statements, those risks
discussed in the Sterling Commerce, Inc. 1998 Annual Report on Form 10-K under
the section titled "Risk Factors," uncertainties with respect to changes or
developments in social, economic, business, industry, market, legal and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties, including the Company's stockholders, customers, suppliers,
business partners, competitors and legislative, regulatory, judicial and other
governmental authorities and officials. Should one or more of these risks or
uncertainties materialize, or should the underlying estimates or assumptions
prove incorrect, actual results or outcomes may vary significantly from those
anticipated, believed, estimated, expected, intended or planned.
-18-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
27.1 -- Financial Data Schedule.
(b) Reports on Form 8-K:
None.
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
-19-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING COMMERCE, INC.
Date: August 5, 1999 By: /s/ Steven P. Shiflet
--------------------------------------------
Steven P. Shiflet
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
-20-
<PAGE>
INDEX TO EXHIBITS
27.1 - Financial Data Schedule.
-21-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STERLING
COMMERCE, INC. FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 325,382
<SECURITIES> 303,295
<RECEIVABLES> 164,848
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 827,296
<PP&E> 173,975
<DEPRECIATION> 77,559
<TOTAL-ASSETS> 1,111,666
<CURRENT-LIABILITIES> 158,221
<BONDS> 0
0
0
<COMMON> 960
<OTHER-SE> 885,119
<TOTAL-LIABILITY-AND-EQUITY> 886,079
<SALES> 445,585
<TOTAL-REVENUES> 445,585
<CGS> 95,260
<TOTAL-COSTS> 302,177
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 162,658
<INCOME-TAX> 58,595
<INCOME-CONTINUING> 104,063
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104,063
<EPS-BASIC> 1.09
<EPS-DILUTED> 1.06
</TABLE>
