<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 000-25285
------------------------
SERENA SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2669809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
500 AIRPORT BOULEVARD, 2ND FLOOR, BURLINGAME, CALIFORNIA 94010-1904
(Address of principal executive offices, including zip code)
650-696-1800
(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 / /
The number of shares of the registrant's Common Stock, par value $0.001,
outstanding as of October 31, 1999 was 25,416,236.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FORWARD LOOKING STATEMENTS
This quarterly report contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. Actual results could differ materially from those projected in the
forward-looking statements as a result of certain factors described herein and
in other documents. Readers should pay particular attention to the section of
this report entitled "Factors that May Affect Future Results" and should also
carefully review the risk factors described in the other documents we file from
time to time with the SEC.
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of October 31, 1999 and
January 31, 1999.......................................... 3
Consolidated Statements of Income for the Three Months and
Nine Months Ended October 31, 1999 and 1998............... 4
Consolidated Statements of Cash Flows for The Nine Months
Ended October 31, 1999 and 1998........................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 10
Item 3 Quantitative and Qualitative Disclosures About Market
Risk...................................................... 29
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................... 30
Item 2 Change in Securities and Use of Proceeds.................... 30
Item 3 Defaults Upon Senior Securities............................. 30
Item 4 Submission of Matters to a Vote of Security Holders......... 30
Item 5 Other Information........................................... 30
Item 6 Exhibits and Reports on Form 8-K............................ 31
Signatures.................................................. 32
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SERENA SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1999 1999
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 65,092,113 $21,468,740
Short-term investments.................................... 26,741,261 --
Accounts receivable, net of allowance of $840,000 and
$311,000 at October 31 and January 31, 1999,
respectively............................................ 13,907,482 13,036,551
Due from principal stockholder............................ -- 196,188
Deferred taxes............................................ 1,119,531 1,119,531
Prepaid expenses and other current assets................. 730,872 565,679
------------ -----------
Total current assets.................................. 107,591,259 36,386,689
Property and equipment, net................................. 2,267,358 1,864,535
Due from principal stockholder.............................. -- 420,581
Intangible assets, net...................................... 22,388,946 20,932,685
Other assets................................................ 116,063 73,431
------------ -----------
TOTAL ASSETS.......................................... $132,363,626 $59,677,921
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 69,471 $ 401,026
Income taxes payable...................................... -- 1,498,725
Accrued expenses.......................................... 9,789,184 7,142,979
Deferred revenue.......................................... 12,400,928 10,839,084
------------ -----------
Total current liabilities............................. 22,259,583 19,881,814
Deferred revenue, net of current portion.................... 2,251,105 1,532,905
Deferred taxes.............................................. 158,152 158,152
------------ -----------
Total liabilities..................................... 24,668,840 21,572,871
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding
Common stock, $0.001 par value; 60,000,000 shares
authorized; 25,416,236 and 20,401,126 shares issued and
outstanding at October 31 and January 31, 1999,
respectively............................................ 25,416 20,401
Additional paid-in capital................................ 88,616,871 28,517,972
Deferred stock-based compensation......................... (504,263) (1,339,030)
Notes receivable from stockholders........................ (3,210,938) (3,233,374)
Accumulated other comprehensive losses.................... (30,357) (25,578)
Retained earnings......................................... 22,798,057 14,164,659
------------ -----------
Total stockholders' equity............................ 107,694,786 38,105,050
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $132,363,626 $59,677,921
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SERENA SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Software licenses....................... $10,233,150 $ 6,696,012 $26,691,087 $16,684,739
Maintenance............................. 7,305,429 4,363,423 18,785,245 12,097,957
Professional services................... 1,512,087 1,170,457 5,556,695 2,363,034
----------- ----------- ----------- -----------
Total revenue......................... 19,050,666 12,229,892 51,033,027 31,145,730
----------- ----------- ----------- -----------
Cost of revenue:
Software licenses....................... 645,570 572,399 2,071,094 1,265,901
Maintenance............................. 1,614,986 1,154,648 4,348,125 3,184,703
Professional services................... 1,243,906 964,566 4,443,897 2,057,139
----------- ----------- ----------- -----------
Total cost of revenue................. 3,504,462 2,691,613 10,863,116 6,507,743
----------- ----------- ----------- -----------
Gross profit.......................... 15,546,204 9,538,279 40,169,911 24,637,987
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing..................... 5,594,569 3,249,077 15,202,150 8,955,777
Research and development................ 1,757,660 1,146,789 4,894,254 3,220,017
General and administrative.............. 1,553,831 1,093,853 4,188,700 2,786,034
Stock-based compensation................ 180,999 512,771 608,164 2,070,864
Amortization of intangible assets....... 627,993 185,814 1,606,329 185,814
Acquired in-process research and
development........................... -- -- 992,341 --
----------- ----------- ----------- -----------
Total operating expenses.............. 9,715,052 6,188,304 27,491,938 17,218,506
----------- ----------- ----------- -----------
Operating income.......................... 5,831,152 3,349,975 12,677,973 7,419,481
Interest and other income, net............ 1,356,992 226,988 3,252,012 570,502
----------- ----------- ----------- -----------
Income before income taxes.............. 7,188,144 3,576,963 15,929,985 7,989,983
Income taxes.............................. 3,129,115 1,653,904 7,296,584 3,595,633
----------- ----------- ----------- -----------
Net income.............................. $ 4,059,029 $ 1,923,059 $ 8,633,401 $ 4,394,350
Translation adjustment.................... (21,876) 9,349 (4,779) 11,543
----------- ----------- ----------- -----------
Comprehensive income.................... $ 4,037,153 $ 1,932,408 $ 8,628,622 $ 4,405,893
----------- ----------- ----------- -----------
Net income per share:
Basic................................... $ 0.16 $ 0.11 $ 0.36 $ 0.27
=========== =========== =========== ===========
Diluted................................. $ 0.15 $ 0.10 $ 0.34 $ 0.26
=========== =========== =========== ===========
Weighted average shares used in per share
calculations:
Basic................................... 24,866,925 17,157,843 24,311,646 16,145,234
=========== =========== =========== ===========
Diluted................................. 26,258,220 18,643,753 25,692,245 17,121,779
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SERENA SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED OCTOBER 31,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 8,633,401 $ 4,394,350
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 656,006 456,505
Increase in allowance for bad debts..................... 528,568 83,972
Loss on sale of property and equipment.................. 13,037 --
Accrued interest on notes receivable.................... (141,162) --
Amortization of deferred stock-based compensation....... 608,164 2,070,864
Amortization of intangible assets....................... 1,606,329 185,814
Acquired in-process research and development............ 992,341 --
Changes in operating assets and liabilities:
Accounts receivable................................... (1,382,515) 619,802
Prepaid expenses and other assets..................... (117,533) (70)
Accounts payable...................................... (355,422) (215,964)
Income taxes payable.................................. (1,564,042) (202,653)
Accrued expenses...................................... 2,224,818 (1,088,475)
Deferred revenue...................................... 2,279,987 3,623,571
------------ -----------
Net cash provided by operating activities........... 13,981,977 9,927,716
------------ -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,009,932) (755,542)
Purchases of short-term investments....................... (26,741,261) --
Common stock repurchased under the common stock repurchase
plan.................................................... (363,770) --
Issuance of notes due from stockholder.................... -- (600,000)
Payment of notes due from stockholder..................... 599,659 181,526
Issuance of notes due from other parties.................. (150,000) --
Payment of notes due from other parties................... 150,000 --
Payment of accrued interest and principal on notes
receivable.............................................. 104,636 --
Cash and cash equivalents acquired in Optima
acquisition............................................. -- 439,092
Cash paid in acquisition of Diamond Optimum Systems, Inc,.
net of cash acquired.................................... (1,462,031) --
------------ -----------
Net cash used in investing activities............... (28,872,699) (734,924)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................. 57,902,226 --
Sale of common stock under the employee stock purchase
plan.................................................... 514,909 --
Exercise of stock options under the employee stock option
plan.................................................... 101,739 --
Payment of notes to stockholders of Optima................ -- (1,350,000)
------------ -----------
Net cash from (used in) financing activities........ 58,518,874 (1,350,000)
------------ -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (4,779) 11,543
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 43,623,373 7,854,335
Cash and cash equivalents at beginning of period............ 21,468,740 9,024,015
------------ -----------
Cash and cash equivalents at end of period.................. $ 65,092,113 $16,878,350
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid........................................... $ 8,731,314 $ 3,730,824
============ ===========
NONCASH INVESTING AND FINANCING ACTIVITY:
Issuance of common stock and notes for acquisition of Optima
Software, Inc............................................. $ -- $21,420,000
============ ===========
Common Stock issued in acquisition of Diamond Optimum
Systems, Inc.............................................. $ 2,234,375 $ --
============ ===========
Restricted stock issued in exchange for notes receivable.... $ -- $ 81,000
============ ===========
Restricted stock cancelled in return for notes receivable... $ (107,625) $ --
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SERENA Software, Inc. (the "Company") is a leading provider of software
change management, or SCM, products and services for managing and controlling
change throughout the software application lifecycle. Its principal markets are
North America and Europe.
The accompanying unaudited consolidated financial statements have been
prepared on substantially the same basis as the audited consolidated financial
statements, and in the opinion of management include all adjustments, consisting
only of normal recurring adjustments, necessary for their fair presentation.
These unaudited consolidated financial statements and the notes thereto have
been prepared in accordance with the Instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all disclosure required by
generally accepted accounting principles and Regulation S-X for annual financial
statements. For these additional disclosures, readers should refer to the
Company's annual report on Form 10-K for the fiscal year ended January 31, 1999.
The interim results presented are not necessarily indicative of results for any
subsequent quarter or for the fiscal year ended January 31, 2000.
(1) NET INCOME PER SHARE
Basic net income per share is computed using the weighted-average number of
shares of unrestricted common stock outstanding. Diluted net income per share is
computed using the weighted-average number of shares of common stock outstanding
and, when dilutive, potentially dilutive common shares from restricted stock and
options to purchase common stock using the treasury stock method.
The following is a reconciliation of the shares used in the computation of
basic and diluted net income per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic net income per share-weighted average
number of unrestricted common shares
outstanding................................. 24,866,925 17,157,843 24,311,646 16,145,234
Effect of potentially dilutive securities
outstanding-restricted stock and options.... 1,661,295 1,485,910 1,380,599 976,545
---------- ---------- ---------- ----------
Shares used in diluted net income per share
computation................................. 26,528,220 18,643,753 25,692,245 17,121,779
========== ========== ========== ==========
</TABLE>
(2) SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
standards for the manner in which public companies report information about
operating segments in annual and interim financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way management organizes the operating
segments within the Company for making operating decisions and assessing
financial performance. The Company's chief operating decision-maker is
considered to be the Company's chief executive officer (CEO). The CEO reviews
financial information presented on an entity level basis accompanied by
disaggregated information about revenues by product type and certain information
6
<PAGE>
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) SEGMENT REPORTING (CONTINUED)
about geographic regions for purposes of making operating decisions and
assessing financial performance. The entity level financial information is
identical to the information presented in the accompanying statements of
operations. Therefore, the Company has determined that it operates in a single
operating segment: change management software.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued Statement of Financial Accounting Standards
("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
SFAS No. 133 addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts. Under SFAS No. 133,
entities are required to carry all derivative instruments in the balance sheet
at fair value. The accounting for changes in the fair value of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, the reason for holding it. The Company must
adopt SFAS No. 133 in fiscal 2000. The Company does not anticipate that SFAS
No. 133 will have an effect on its financial statements.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-9, SOFTWARE REVENUE RECOGNITION, with
Respect to Certain Arrangements. SOP 98-9 requires recognition of revenue using
the "residual method" in a multiple-element arrangement when vendor specific
objective evidence of fair value does not exist for one or more of the delivered
elements in the arrangement. Under the residual method, the total fair value of
the undelivered elements is deferred and subsequently recognized in accordance
with SOP 97-2. The Company does not expect a material change to its accounting
for revenues as a result of the provisions of SOP 98-9.
(4) ACQUISITION OF DIAMOND OPTIMUM SYSTEMS, INC.
On June 14, 1999, the Company acquired Diamond Optimum Systems, Inc.
("Diamond"), a provider of enterprise software change management solutions (SCM)
for NT and UNIX environments. As of the end of the Company's third fiscal
quarter on October 31, 1999, the operations of Diamond had been fully integrated
into the operations of the Company. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the results of operations of
Diamond have been included in the Company's consolidated financial statements
from June 14, 1999. The Company acquired all the assets and assumed all the
liabilities of Diamond in exchange for cash totaling $1.75 million and the
issuance of 175,000 shares of the Company's common stock valued at $12.77 per
share. The transaction was valued at approximately $4.5 million with the
allocation of the total consideration as follows:
<TABLE>
<S> <C>
Net tangible assets......................................... $ 358,060
Acquired technology......................................... 1,917,276
Acquired in-process research and development................ 992,341
Work-force-in-place......................................... 179,100
Noncompete agreement........................................ 227,451
Goodwill.................................................... 786,694
----------
Total consideration......................................... $4,460,922
==========
</TABLE>
7
<PAGE>
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) ACQUISITION OF DIAMOND OPTIMUM SYSTEMS, INC. (CONTINUED)
Acquired technology, consisting of current completed technologies at the
date of acquisition valued on the premise of fair market value in continued use
under the discounted cash flow approach, is being amortized over a 5 year
period, the period of time the Company estimates as its economic useful life.
Acquired in-process research and development, consisting of current technologies
under development at the date of acquisition and valued on the premise of fair
market value in continued use under the discounted cash flow approach, was
expensed immediately in the second fiscal quarter ended July 31, 1999 in
accordance with generally accepted accounting principles. See Note 5 for further
discussion of Acquired In-Process Research and Development. Work-force-in-place,
consisting principally of the Diamond development team, was valued on a
replacement cost basis and is being amortized over a six-month period, the
period of time the Company estimates would be required to hire, train, and
achieve full productivity for a replacement work force. The noncompete agreement
was entered into with a Diamond officer and founder who will continue with the
combined company. The noncompete agreement was valued based on his anticipated
salary and benefits for the period of the agreement and is being amortized over
the two-year term of the agreement. Goodwill represents the excess of the
purchase price over the fair value of the net assets acquired and is being
amortized over 7 years.
Pro forma financial information giving effect to the acquisition as if it
had occurred at the beginning of the periods presented would not have been
materially different than the Company's actual operating results.
(5) ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
As a result of the Company's acquisition of Diamond on June 14, 1999, the
company recorded in it's second fiscal quarter ended July 31, 1999 acquired
in-process research and development totaling $992,341. The premise of value was
fair market value in continued use.
Among the assets that were valued by the Company were the Change Management
2.0, the Problem Management and the Enterprise Management products which were
currently under development at the date of acquisition. These technologies
currently under development were valued on the premise of fair market value in
continued use employing a version of the income approach referred to as the
discounted cash flow approach. This methodology is based on discounting to
present value, at an appropriate risk-adjusted discount rate, both the
expenditures to be made to complete the development efforts (excluding the
efforts to be completed on the development efforts underway) and the operating
cash flows which the applications are projected to generate, less a return on
the assets necessary to generate the operating cash flows.
From these projected revenues, the Company deducted costs of sales,
operating costs (excluding costs associated with the efforts to be completed on
the development efforts underway), royalties and taxes to determine net cash
flows. The Company estimated the percentage of completion of the development
efforts for each application by comparing the estimated costs incurred and
portions of the development accomplished through the acquisition date by the
total estimated cost and total development effort of developing these same
applications. This percentage was calculated for each application and was then
applied to the net cash flows for which each application was projected to
generate. These net cash flows were then discounted to present values using
appropriate risk-adjusted discount rates in order to arrive at discounted fair
values for each application.
8
<PAGE>
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT (CONTINUED)
In short, the percentage complete and the appropriate risk-adjusted discount
rate for each application were as follows:
<TABLE>
<CAPTION>
APPLICATION UNDER DEVELOPMENT PERCENTAGE COMPLETE DISCOUNT RATE
- ----------------------------- ------------------- -------------
<S> <C> <C>
Change Management version 2.0................. 60.00% 25.00%
Project Management............................ 75.00% 25.00%
Enterprise Management......................... 25.38% 27.50%
</TABLE>
The rates used to discount the net cash flows to present value were
initially based on the weighted average cost of capital ("WACC"). The Company
used discount rates of 25.0% and 27.5% for valuing the acquired in-process
research and development and 25.0% for the core technologies. These discount
rates are higher than the implied WACC due to the inherent uncertainties
surrounding the successful development of the acquired in-process research and
development, the useful life of such in-process research and development, the
profitability levels of such in-process research and development, and the
uncertainty of technological advances that were unknown at the time.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This section of the Form 10-Q contains forward-looking statements based upon
current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Our actual results and the timing of
certain events could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in this section under "factors that may affect future results" and
elsewhere in, or incorporated by reference into, this report. It is important
that the discussion below be read together with the attached consolidated
financial statements and notes thereto, with the discussion of such risks and
uncertainties and with the audited financial statements and notes thereto, and
the Management's Discussion and Analysis of Results of Operations and Financial
Condition, contained in the Company's Form 10-K for fiscal 1999.
RESULTS OF OPERATIONS
References to the dollar and percentage increases or decreases set forth
below in this discussion and analysis of SERENA's results of operations are
derived from comparisons of SERENA's consolidated statements of income for the
three and nine month periods ended October 31, 1999 to the consolidated
statements of income for the three and nine month periods ended October 31,
1998. These results include the results of Optima Software ("OPTIMA") from
September 25, 1998, the date our acquisition of OPTIMA was completed, and of
Diamond Optimum Systems, Inc. ("DIAMOND") from June 14, 1999, the date our
acquisition of DIAMOND was completed.
10
<PAGE>
The following table sets forth our results of operations expressed as a
percentage of total revenue. These operating results for the periods presented
are not necessarily indicative of the results for the full fiscal year or any
other period.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE PERCENTAGE OF REVENUE
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software licenses............................. 53.7% 54.7% 52.3% 53.6%
Maintenance................................... 38.4% 35.7% 36.8% 38.8%
Professional services......................... 7.9% 9.6% 10.9% 7.6%
----- ----- ----- -----
TOTAL REVENUE................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of revenue:
Software licenses............................. 3.4% 4.7% 4.1% 4.1%
Maintenance................................... 8.5% 9.4% 8.5% 10.2%
Professional services......................... 6.5% 7.9% 8.7% 6.6%
----- ----- ----- -----
TOTAL COST OF REVENUE......................... 18.4% 22.0% 21.3% 20.9%
----- ----- ----- -----
GROSS PROFIT.................................. 81.6% 78.0% 78.7% 79.1%
----- ----- ----- -----
Operating expenses:
Sales and marketing........................... 29.4% 26.6% 29.8% 28.8%
Research and development...................... 9.2% 9.4% 9.6% 10.3%
General and administrative.................... 8.1% 8.9% 8.2% 8.9%
Stock-based compensation...................... 1.0% 4.2% 1.2% 6.7%
Amortization of intangible assets............. 3.3% 1.5 3.2% 0.6
Acquired in-process research And
development................................. -- -- 1.9% --
----- ----- ----- -----
Total operating expenses........................ 51.0% 50.6% 53.9% 55.3%
----- ----- ----- -----
OPERATING INCOME................................ 30.6% 27.4% 24.8% 23.8%
Interest and other income, net.................. 7.1% 1.8% 6.4% 1.8%
----- ----- ----- -----
Income before income taxes...................... 37.7% 29.2% 31.2% 25.6%
Income taxes.................................... 16.4% 13.5% 14.3% 11.5%
----- ----- ----- -----
NET INCOME...................................... 21.3% 15.7% 16.9% 14.1%
===== ===== ===== =====
</TABLE>
REVENUE
We derive revenue from software licenses, maintenance and professional
services. Our total revenue increased $6.8 million or 56% to $19.1 million in
the current fiscal quarter ended October 31, 1999 from $12.3 million in the same
quarter a year ago. For the nine month period ended October 31, 1999, total
revenue increased $19.9 million or 64% to $51.0 million from $31.1 million in
the same nine month period a year ago.
SOFTWARE LICENSES. Software licenses revenue as a percentage of total
revenue has remained relatively constant at the 52% to 55% range in the current
fiscal quarter and nine month periods ended October 31, 1999 and the same
periods a year ago. Software licenses revenue increased $3.5 million or 53% to
$10.2 million in the current fiscal quarter from $6.7 million in the same
quarter a year ago. For the nine month period ended October 31, 1999, software
licenses revenue increased $10.0 million or 60% to $26.7 million from
$16.7 million in the same nine months a year ago. For both the quarter and nine
months, the dollar increase is generally attributed to increased demand for new
licenses of FULL.CYCLE MAINFRAME products as a result of greater customer
awareness of and need for third
11
<PAGE>
party SCM solutions, fueled by new IT initiatives around the internet, eCommerce
and the webification of legacy systems. To a lesser extent, the acquisitions of
Optima and Diamond, an increase in sales force productivity and personnel, and
software license price increases have all contributed to the dollar increase. In
particular, sales of our CHANGE MAN and STARTOOL products grew significantly,
with increases in aggregate of 98% and 139% when comparing the current fiscal
quarter and nine months ended October 31, 1999, respectively, to the same
periods from a year ago. CHANGE MAN, STARTOOL AND COMPAREX continue to make up a
significant portion of total licenses revenue. Those products accounted for
$9.6 million or 93% and $24.9 million or 93% of total software licenses revenue
in the current fiscal quarter and current fiscal nine months, respectively, as
compared to $5.8 million or 86% and $13.9 million or 83% in the same quarter and
nine months, respectively, a year ago.
MAINTENANCE. Maintenance revenue as a percentage of total revenue was 38%
and 37% in the current fiscal quarter and current fiscal nine months,
respectively, ended October 31, 1999 as compared to 36% and 39% in the same
quarter and nine months, respectively, a year ago. Maintenance revenue increased
$2.9 million or 67% to $7.3 million in the current fiscal quarter from
$4.4 million in the same quarter a year ago. For the nine month period ended
October 31, 1999, maintenance revenue increased $6.7 million or 55% to
$18.8 million from $12.1 million in the same nine months a year ago. For both
the quarter and nine months, the dollar increase reflects both growth in
software license revenue, as new licenses generally include one year of
maintenance, renewals of maintenance agreements by existing customers and, to a
lesser extent, maintenance price increases. Maintenance revenue as a percentage
of total revenue increased in the current fiscal quarter and decreased in the
current fiscal nine months ended October 31, 1999 when compared to the same
quarter and nine months, respectively, a year ago. In general, the decrease in
maintenance revenue as a percentage of total revenue is due to the growth in
software license revenue, which is generally recognized upon contract signing
and delivery of the software, whereas maintenance revenue is deferred and
amortized over the contractual term of the arrangement, usually one year.
PROFESSIONAL SERVICES. Professional services revenue was 8% and 11% of
total revenue in the current fiscal quarter and current fiscal nine months,
respectively, ended October 31, 1999 as compared to 10% and 8% in the same
quarter and nine months, respectively, a year ago. Professional services revenue
increased $0.3 million, or 29% to $1.5 million in the current fiscal quarter
from $1.2 million in the same quarter a year ago. For the nine month period
ended October 31, 1999, professional services revenue increased $3.2 million or
135% to $5.6 million from $2.4 million in the same nine months a year ago. For
both the quarter and nine months, the dollar increase is attributable to greater
consulting opportunities resulting from our larger installed customer base and
our expanded consulting service capabilities resulting from the acquisition of
Optima. Certain professional services contracts in the third quarter have been
delayed due to the current customer focus on Year 2000 remediation.
COST OF REVENUE
Cost of revenue, which consists of cost of software licenses, cost of
maintenance and cost of professional services, was $3.5 million or 18% and
$10.9 million or 21% of total revenue in the current fiscal quarter and current
fiscal nine months, respectively, as compared to $2.7 million or 22% and
$6.5 million or 21% in the same quarter and nine months, respectively, a year
ago. For both the quarter and nine months, the increases in absolute dollar
terms are due primarily to increased expenses associated with professional
services revenue and maintenance revenue, including personnel additions and the
acquisition of Optima to support professional services and maintenance revenue
growth, and the increase in software sublicense fees as a result of increases in
software licenses. Cost of revenue as a percentage of total revenue decreased 4%
and remained flat in the current quarter and current nine months, respectively,
ended October 31, 1999, when compared to the same periods a year ago, as a
12
<PAGE>
result of the growth in software licenses revenues and maintenance revenues,
which are higher margin revenues, exceeding the growth in professional services
revenue.
SOFTWARE LICENSES. Cost of software licenses consists principally of
sublicense fees associated with our STARTOOL, STARWARP and DETECT+RESOLVE
MAINFRAME products. Cost of software licenses as a percentage of total software
licenses revenue was 6% and 8% in the current fiscal quarter and current fiscal
nine months, respectively, ended October 31, 1999 as compared to 9% and 8% in
the same periods, respectively, a year ago. Cost of software licenses increased
$0.1 million to $0.7 million and $0.8 million to $2.1 million in the current
fiscal quarter and current fiscal nine months, respectively, from $0.6 and
$1.3 million in the same quarter and nine months, respectively, a year ago. As a
percentage of total software licenses revenue, cost of software licenses
decreased by 2% and remained flat in the current fiscal quarter and current
fiscal nine months, respectively, when compared to the same periods a year ago
predominantly due to decreases in royalty bearing software licenses as a
percentage of total software licenses revenue. Specifically, percentage
decreases in STARWARP and DETECT+RESOLVE MAINFRAME in both the quarter and nine
month periods more than offset percentage increases in STARTOOL over the same
periods. In absolute dollar terms, the increases are due to increases in royalty
bearing software licenses in the current quarter and current nine months, when
compared to the same periods from a year ago. Specifically, dollar increases in
STARTOOL and DETECT+RESOLVE MAINFRAME in both the quarter and nine month periods
more than offset decreases in STARWARP over the same periods.
MAINTENANCE. Cost of maintenance consists primarily of salaries, bonuses
and other costs associated with our customer support organizations, and to a
lesser extent, sublicense fees associated with our STARTOOL, STARWARP AND
DETECT+RESOLVE MAINFRAME PRODUCTS. Cost of maintenance as a percentage of total
maintenance revenue was 22% and 23% in the current fiscal quarter and current
fiscal nine months, respectively, as compared to 26% in both the same quarter
and nine months a year ago. Cost of maintenance increased $0.4 million or 40% to
$1.6 million and $1.1 million or 37% to $4.3 million in the current fiscal
quarter and current fiscal nine months, respectively, from $1.2 million and
$3.2 million in the same quarter and nine months, respectively, a year ago. For
both the quarter and nine months, cost of maintenance as a percentage of total
maintenance revenue decreased predominantly due to revenue growth exceeding the
growth in customer support organization costs. For both the quarter and nine
months, the dollar increase is predominately due to increased expenses
associated with our customer support organization including personnel additions
needed to support the maintenance revenue growth and to a lesser extent,
increases in sublicense fees. Sublicense fees are paid to owners of third party
products for providing maintenance enhancements and code fixes.
PROFESSIONAL SERVICES. Cost of professional services consists of salaries,
bonuses and other costs associated with supporting our professional services
organization. Cost of professional services as a percentage of total
professional services revenue was 82% and 80% in the current fiscal quarter and
current fiscal nine months, respectively, as compared to 82% and 87% in the same
quarter and nine months, respectively, a year ago. Cost of professional services
increased $0.2 million or 29% to $1.2 million and $2.3 million or 116% to
$4.4 million in the current fiscal quarter and current fiscal nine months,
respectively, from $1.0 million and $2.1 million in the same quarter and nine
months, respectively, a year ago. For the current fiscal nine months, and to a
lesser extent the current fiscal quarter, the dollar increases are predominately
due to increased expenses associated with the acquisition of Optima in last
year's third fiscal quarter which significantly increased our professional
services organization and costs. Personnel additions and other infrastructure
costs needed to support the professional services revenue growth also
contributed to the dollar increases.
13
<PAGE>
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses, payroll taxes, and employee benefits as well
as travel, entertainment and marketing expenses. Sales and marketing expenses as
a percentage of total revenue were 29% and 30% in the current fiscal quarter and
current fiscal nine months, respectively, as compared to 27% and 29% in the same
quarter and nine months, respectively, a year ago. Sales and marketing expenses
increased $2.3 million or 72% to $5.6 million and $6.2 million or 70% to
$15.2 million in the current fiscal quarter and current fiscal nine months,
respectively, from $3.3 million and $9.0 million in the same quarter and nine
months, respectively, a year ago. As a percentage of total revenue and in
absolute dollar terms, for both the quarter and nine months, the increases are
due primarily to our expansion of our direct sales and marketing organization,
To a lesser extent, our marketing initiatives surrounding our new FULL.CYCLE
distributed systems and SERNET products capabilities and the development of our
telesales efforts also contributed to the increases. In absolute dollar terms,
we expect sales and marketing expenses to increase as we continue to hire
additional sales and marketing personnel and undertake additional marketing
programs.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries, bonuses, payroll taxes, and employee benefits and costs
attributable to research and development activities. Research and development
expenses as a percentage of total revenue essentially did not change when
comparing the current fiscal quarter and current fiscal nine months to the same
periods from a year ago. Research and development expenses as a percentage of
total revenues remained at 9% for each of this year's quarters and at 10% for
each of the nine month periods. Research and development expenses increased
$0.7 million, or 53%, to $1.8 million and $1.7 million, or 52%, to $4.9 million
in the current fiscal quarter and current fiscal nine months, respectively, from
$1.1 million and $3.2 million in the same quarter and nine months, respectively,
a year ago. For both the quarter and nine months, the dollar increases are
primarily due to salary, bonus, payroll tax, and employee benefit costs
associated with the expansion of our research and development efforts to enhance
existing products and develop our new FULL.CYCLE distributed systems and SERNET
products. To a lessor extent, the acquisition of Diamond also expanded our
research and development organization and increased our research and development
expenses. We expect research and development expenses to increase as we continue
to hire additional research and development personnel to develop our FULL.CYCLE
distributed systems product suite and our SERNET products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, bonuses, payroll taxes, and benefits and certain
non-allocable administrative costs, including legal and accounting fees and bad
debts. General and administrative expenses as a percentage of total revenue was
8% in both the current fiscal quarter and current fiscal nine months as compared
to 9% in both periods a year ago. General and administrative expenses increased
$0.5 million, or 42%, to $1.6 million and $1.4 million, or 50%, to $4.2 million
in the current fiscal quarter and current fiscal nine months, respectively, from
$1.1 million and $2.8 million in the same quarter and nine months, respectively,
a year ago. For both the quarter and nine months, the dollar increases are
primarily due to increases in salary, bonus, payroll tax and employee benefit
costs associated with the expansion of our administrative infrastructure to
support growth. To a lessor extent, additional costs were incurred in the
current fiscal year associated with being a public company. We expect general
and administrative expenses to increase as we expand our general and
administrative infrastructure in order to support our increased sales,
marketing, professional services and maintenance activities.
STOCK-BASED COMPENSATION. In total, SERENA recorded aggregate deferred
stock-based compensation of $4.6 million in connection with the issuance of
restricted stock and grants of options to purchase common stock. Deferred
stock-based compensation is generally being amortized over the 36 to 48 month
vesting periods of the related awards. This amortization is being recorded in a
manner
14
<PAGE>
consistent with FASB Interpretation No. 28. Of the total deferred stock-based
compensation, $0.2 million and $0.6 million was amortized in the current fiscal
quarter and current fiscal nine months, respectively, as compared to
$0.5 million and $2.1 million in the same quarter and nine months, respectively,
from a year ago. We expect the stock-based compensation charge will continue to
trend downward quarter over quarter as the related awards vest or are forfeited.
As of October 31, 1999, SERENA had $0.4 million in unamortized stock-based
compensation, all of which is expected to be fully amortized before the end of
fiscal 2003.
AMORTIZATION OF INTANGIBLE ASSETS. In connection with the acquisitions of
Optima in September, 1998 and Diamond in June, 1999, the Company has recorded
$24.8 million in intangible assets, of which, $22.4 million is unamortized as of
October 31, 1999. Combined, intangible assets are being amortized over periods
of one year or less on $0.7 million, two to seven years on $2.9 million and
fifteen years on the remaining $21.2 million. Of the total intangible assets,
$0.6 million and $1.6 million was amortized in the current fiscal quarter and
current fiscal nine months, respectively, ended October 31, 1999, as compared to
$0.2 million in both the same quarter and nine months from a year ago. We expect
to amortize an additional $0.6 million in the fourth quarter of fiscal 2000,
$2.0 million in fiscal 2001 and $1.9 million in fiscal 2002. The intangible
assets will be fully amortized by the end of fiscal 2014.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with SERENA's
acquisition of Diamond in the second quarter of fiscal 2000, the Company took a
one-time charge of $1.0 million in recording acquired in-process research and
development. See notes 4 and 5 in the Notes to Consolidated Financial
Statements.
INTEREST AND OTHER INCOME, NET
Interest and other income, net increased $1.2 million to $1.4 million and
$2.7 million to $3.3 million in the current fiscal quarter and current fiscal
nine months, respectively, from $0.2 million and $0.6 million in the same
quarter and nine months, respectively, a year ago. For both the quarter and nine
months, the dollar increase in interest and other income, net is predominantly
due to the increase in cash and cash equivalent balances and short-term
investments resulting from the Company's initial public offering in the first
quarter of fiscal 2000 which generated $57.9 million in net proceeds to the
Company. To a lesser extent, increases in cash and cash equivalent balances
period over period resulting from cash generated by operations also contributed
to the increases.
INCOME TAXES
Income taxes were $3.1 million and $7.3 million in the current fiscal
quarter and current fiscal nine months, respectively, ended October 31, 1999 as
compared to $1.7 million and $3.6 million in the same quarter and nine months,
respectively, of a year ago. As a percentage of pretax income, income taxes were
44% and 46% in the current fiscal quarter and fiscal nine months, respectively,
as compared to 46% and 45% in the same quarter and nine month periods,
respectively, a year ago. SERENA's effective income tax rate has decreased when
compared to the same fiscal quarter a year ago predominantly due to the increase
in pretax profits. Conversely, SERENA's effective income tax rate has increased
when compared to the same nine months a year ago predominantly due to the fact
that total nondeductible charges in the current fiscal year, including the
$1.0 million one time charge in the second quarter for acquired in-process
research and development, are greater when compared to the same nine month
period from a year ago. SERENA's effective income tax rate has historically
benefited from the United States research and experimentation tax credit and tax
benefits generated from export sales made from the United States. To a lesser
extent, SERENA has also experienced higher marginal tax rates resulting from
substantially higher pretax profits year over year.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Company's initial public offering of its common stock in
February 1999, operations were financed and all capital requirements were met
through cash flow from operations. In the first quarter of fiscal 2000, we
completed our initial public offering of common stock resulting in net proceeds
to SERENA of $57.9 million. Net cash provided by operating activities rose to
$14.0 million in the current fiscal nine months ended October 31, 1999 from
$9.9 million in the same period a year ago. Our principal investing activities
during the current fiscal nine months ended October 31, 1999 were the purchase
of $26.7 million of short-term investments and the acquisition of Diamond where
the Company exchanged $1.75 million in cash and issued 175,000 shares of its
common stock valued at $12.77 per share for all the assets and assumed
liabilities of Diamond. At October 31, 1999, SERENA had $65.1 million in cash
and cash equivalents and another $26.7 million in short-term investments.
At October 31, 1999, we had working capital of $85.3 million and trade
accounts receivable, net of allowances, of $13.9 million. Our total current and
long term deferred revenues were $14.7 million. In addition, we did not have any
material commitments for capital expenditures and did not have any revolving
credit agreement or other term loan agreements with any bank or other financial
institution.
We believe that the net proceeds from our initial public offering and cash
flows from operations (including prepaid maintenance fees) will satisfy our
working capital and capital expenditure requirements for at least the next
twelve months.
YEAR 2000 COMPLIANCE
Many computer systems and software products are coded to accept only two
digit entries in the date code field. These date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, many companies' software and computer systems may need to be upgraded
or replaced in order to comply with such Year 2000 requirements.
In the ordinary course of our business, we test and evaluate our software
products. We believe that our software products are generally Year 2000
compliant, meaning that the use or occurrence of dates on or after January 1,
2000 will not materially affect the performance of such software products or the
ability of such products to correctly create, store, process and output
information of data involving dates. However, we may learn that certain of our
software products do not contain all necessary software routines and codes
necessary for the accurate calculation, display, storage and manipulation of
data involving dates. In addition, in certain cases, we have warranted that the
use or occurrence of dates on or after January 1, 2000 will not adversely affect
the performance of our products with respect to four digit date dependent data
or the ability to create, store, process and output information related to such
data. If any of our licensees experience Year 2000 problems as a result of their
use of our software products, those licensees could assert claims for damages.
Our standard licensing agreement provides that if our products do not perform to
their specifications, we will correct such problems or issue replacement
software. If these corrective measures fail, we may refund the license fee
associated with the non-performing product. Our standard software license
agreement limits our liability to the amount of the license fee paid, if the
license has been in effect for less than one year, or for the amount of the
license's annual maintenance renewal fee, if the license is more than one year
old. To date we have not received any Year 2000 related claims on our software
products.
SERENA's management is currently addressing Year 2000 problems as they
relate to our internal operating systems. Our Year 2000 review of our internal
operating systems is concentrated on our internal accounting and customer
service systems, the systems we believe are most important to our business. We
have found our internal accounting software and our customer service internal
operating systems to be Year 2000 compliant. If any Year 2000 issues are
uncovered with respect to our other internal systems, we believe these problems
will be able to be resolved without material difficulty or cost as replacement
systems are available on commercially reasonable terms.
16
<PAGE>
In view of our Year 2000 review and remediation efforts to date, and the
limited activities that remain to be completed, we do not consider contingency
planning to be necessary. To date costs related to Year 2000 issues have not
been material, and we do not believe such costs will be material in the future.
We have sought assurances from the suppliers of all third party equipment
and software that we believe are critical to our business that their products
are Year 2000 compliant. While SERENA has received several assurances as to the
Year 2000 compliance of these third party products, we generally do not have any
contractual rights with the third party providers should these equipment or
software fail due to Year 2000 issues. If this third party equipment or software
does not operate properly with regard to the Year 2000, we may incur unexpected
expenses to remedy any problems. These expenses could potentially include
purchasing replacement hardware and software.
In addition, the purchasing patterns of our customers and potential
customers may be affected by Year 2000 issues. Many companies are spending
significant resources to correct their current software systems for Year 2000
compliance. While sales of certain of our products, in particular STARTOOL,
STARWARP and COMPAREX, have benefited from increased customer spending on Year
2000 readiness, we believe sales of our CHANGE MAN product have been and will
continue to be adversely affected by customer focus on Year 2000 issues in the
near term. Customers with limited IT budgets who face material Year 2000 issues
are spending their limited resources remediating these Year 2000 problems
instead of investing in more general IT products such as CHANGE MAN. Market
acceptance of SERENA's products to address general IT business needs as well as
resolution of specific business issues such as Year 2000 readiness is critical
to our business and future success.
For risks concerning SERENA related to Year 2000 see "Factors That May
Affect Future Results"--"Potential Year 2000 Problems with Our Software or Our
Internal Operating Systems Could Adversely Affect Our Business" and "Reduced
Customer Focus and Spending on Year 2000 Remediation and EMU Conversion Could
Adversely Affect the Sales of Certain of Our Products; Customer Use of Our
Products for Year 2000 and EMU Issues May Not Lead to Increased Sales of Our
Other Products."
FACTORS THAT MAY AFFECT FUTURE RESULTS
This report on form 10-Q, including this management's discussion and
analysis of financial condition and results of operations, contains
forward-looking statements and other prospective information relating to future
events. These forward-looking statements and other information are subject to
certain risks and uncertainties that could cause results to differ materially
from historical results or anticipated results, including the following:
THERE ARE MANY FACTORS, INCLUDING SOME BEYOND OUR CONTROL, THAT MAY CAUSE
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
Our quarterly operating results have varied greatly in the past and may vary
greatly in the future depending upon a number of factors described below and
elsewhere in this "Factors That May Affect Future Results" section of this
quarterly report, including many that are beyond our control. As a result, we
believe that quarter-to-quarter comparisons of our financial results are not
necessarily meaningful, and you should not rely on them as an indication of our
future performance. Factors that may materially affect our quarterly operating
results include the following, as well as others discussed in this Form 10-Q:
- The size, timing and contractual terms of large orders for our software
products
- The budgeting cycles of our customers and potential customers and their
willingness to invest in new SCM solutions or upgrade their existing
solutions
17
<PAGE>
- Market demand for our software products and services, including our
distributed systems products that are currently under development
- Our ability to develop and introduce on a timely basis and to market new
and enhanced versions of our software, including our new distributed
systems products
- Seasonal trends in customer purchasing patterns
- Activities by our competitors, including releases of new software
products, changes in pricing policies and acquisitions or strategic
partnership activities
- Any downturn in our customers' businesses, in the domestic economy or in
international economies where our customers do substantial business
- Changes in the mix of software products and services sold by us, including
the mix between higher margin software products and lower margin
maintenance and services and the percentage of software products sold
which require us to pay a sublicense fee to a third party
- Our ability to hire, integrate and retain technical, sales, marketing and
professional services personnel
- Risks associated with our planned international expansion, including
longer sales cycles and currency fluctuations
- Changes in our pricing policies resulting from competitive pressures or
other factors
- Cancellation of maintenance agreements by customers or any significant
decrease in the percentage of customers who renew their maintenance
agreements with us
- Software defects and other product quality problems
Our software license revenue in any quarter depends on orders booked and
shipped in the last month, weeks or days of that quarter. At the end of each
quarter, we typically have either minimal or no backlog of orders for the
subsequent quarter. If a large number of orders or several large orders do not
occur or are deferred, our revenue in that quarter could be substantially
reduced. This would materially adversely affect our operating results and could
impair our business in future periods. Because we do not know when, or if, our
potential customers will place orders and finalize contracts, we cannot
accurately predict our revenue and operating results for future quarters.
Historically, a majority of our revenue has been attributable to the
licenses of our FULL.CYCLE MAINFRAME software products. Changes in the mix of
software products and services sold by us, including the mix between higher
margin software products and lower margin maintenance and services, could
materially affect our operating results for future quarters as could the
percentage of software products sold which require us to pay a sublicense fee to
a third party.
SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY AFFECT OUR QUARTERLY
OPERATING RESULTS
We have experienced and expect to continue to experience seasonality in
sales of our software products. These seasonal trends materially affect our
quarter-to-quarter operating results. Revenue and operating results in our
quarter ending January 31 are typically higher relative to our other quarters,
because many customers make purchase decisions based on their calendar year-end
budgeting requirements. In addition, our January quarter tends to reflect the
effect of the incentive compensation structure for our sales organization, which
is based on satisfaction of fiscal year-end quotas. As a result, we have
historically experienced a substantial decline in revenue in the first quarter
of each fiscal year relative to the preceding quarter. We are also currently
attempting to expand our presence in international markets, particularly in
Europe. We expect our quarter ending October 31 to reflect the effects of summer
slowing of international business activity and spending activity generally
associated
18
<PAGE>
with that time of year, particularly in Europe. To the extent that our revenue
in Europe or other parts of the world increase in future periods, we expect our
period-to-period revenues to reflect any seasonal buying patterns in these
markets.
WE EXPECT THAT OUR OPERATING EXPENSES WILL INCREASE SUBSTANTIALLY IN THE FUTURE
AND THESE INCREASED EXPENSES MAY ADVERSELY AFFECT OUR FUTURE OPERATING RESULTS
AND FINANCIAL CONDITION
Although SERENA has been profitable in recent years, we may not remain
profitable on a quarterly or annual basis in the future. We anticipate that our
expenses will increase substantially in the foreseeable future as we:
- Increase our sales and marketing activities, including expanding our
United States and international direct sales forces and extending our
telesales efforts
- Develop our technology, including our FULL.CYCLE suite of SCM products for
distributed systems
- Broaden our professional services offerings and delivery capabilities
- Expand our distribution channels
- Pursue strategic relationships and acquisitions
With these additional expenses, in order to maintain our current levels of
profitability, we will be required to increase our revenue correspondingly. Any
failure to significantly increase our revenue as we implement our product,
service and distribution strategies would materially adversely affect our
business, quarterly and annual operating results and financial condition.
Although our revenue has grown in recent years, we do not believe that we will
maintain this rate of revenue growth. In addition, we may not experience any
revenue growth in the future, and our revenue could in fact decline. Our efforts
to expand our software product suites, sales and marketing activities, direct
and indirect distribution channels and professional service offerings and to
pursue strategic relationships or acquisitions may not succeed or may prove more
expensive than we currently anticipate. As a result, we cannot predict our
future operating results with any degree of certainty.
OUR FUTURE REVENUE IS SUBSTANTIALLY DEPENDENT UPON OUR INSTALLED CUSTOMERS
RENEWING MAINTENANCE AGREEMENTS FOR OUR PRODUCTS AND LICENSING ADDITIONAL SERENA
SCM PRODUCTS; OUR FUTURE PROFESSIONAL SERVICE AND MAINTENANCE REVENUE IS
DEPENDENT ON FUTURE SALES OF OUR SOFTWARE PRODUCTS
We depend on our installed customer base for future revenues from
maintenance renewal fees and licenses of additional SCM products. If our
customers do not purchase additional products or cancel or fail to renew their
maintenance agreements, this could materially adversely affect our business and
future quarterly and annual operating results. The terms of our standard license
arrangements provide for a one-time license fee and a prepayment of one year of
software maintenance and support fees. The maintenance agreements are renewable
annually at the option of the customers and there are no minimum payment
obligations or obligations to license additional software. Therefore, our
current customers may not necessarily generate significant maintenance revenue
in future periods. In addition, our customers may not necessarily purchase
additional products, upgrades or professional services. Our professional service
revenue and maintenance revenue are also dependent upon the continued use of
these services by our installed customer base. Any downturn in our software
license revenue would have a negative impact on the growth of our professional
service revenue and maintenance revenue in future quarters.
19
<PAGE>
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON SALES OF OUR FULL.CYCLE
MAINFRAME PRODUCTS FOR OUR REVENUE
Historically, a large majority of our software license revenue has resulted
from the sale of our FULL.CYCLE MAINFRAME products. Any factors adversely
affecting the pricing of, demand for or market acceptance of our FULL.CYCLE
MAINFRAME products, such as competition or technological change, could
materially adversely affect our business and quarterly and annual operating
results. In particular, CHANGE MAN, COMPAREX and STARTOOL, three of our
FULL.CYCLE MAINFRAME products, have been responsible for a substantial majority
of our revenue. We expect that these products will continue to account for a
large portion of our software license revenue for the foreseeable future. Our
future operating results depend on the continued market acceptance of our
FULL.CYCLE MAINFRAME products, including future enhancements.
IF THE SCM MARKET DOES NOT EVOLVE AS WE ANTICIPATE, OUR BUSINESS WILL BE
ADVERSELY AFFECTED
If we fail to properly assess and address the SCM market or if our products
and services fail to achieve market acceptance for any reason, our business and
quarterly and annual operating results would be materially adversely affected.
The SCM market is in an early stage of development. IT organizations have
traditionally addressed SCM needs internally and have only recently become aware
of the benefits of third-party SCM solutions as their SCM requirements have
become more complex. Since the market for our products is still evolving, it is
difficult to assess the competitive environment or the size of the market that
may develop. Our future financial performance will depend in large part on the
continued growth in the number of businesses adopting third-party SCM products
and the expansion of their use on a company-wide basis. The SCM market for
third-party products may grow more slowly than we anticipate. In addition,
technologies, customer requirements and industry standards may change rapidly.
If we cannot improve or augment our products as rapidly as existing
technologies, customer requirements and industry standards evolve, our products
or services could become obsolete. The introduction of new or technologically
superior products by competitors could also make our products less competitive
or obsolete. As a result of any of these factors, our position in existing
markets or potential markets could be eroded.
OUR BUSINESS IS DEPENDENT ON THE CONTINUED MARKET FOR IBM AND IBM-COMPATIBLE
MAINFRAMES
We are substantially dependent upon the continued use and acceptance of IBM
and IBM-compatible mainframes and the growth of this market. If the role of the
mainframe does not increase as we anticipate, or if it in any way decreases,
this would materially adversely affect our business, future quarterly and annual
operating results and financial condition. Additionally, if there is a wide
acceptance of other platforms or if new platforms emerge that provide enhanced
enterprise server capabilities, our business and future operating results may be
materially adversely affected. Substantially all of our software license revenue
to date has been attributable to sales of our FULL.CYCLE MAINFRAME products. We
expect that, for the foreseeable future, substantially all of our software
license revenue will continue to come from sales of our mainframe products. As a
result, future sales of our existing products and associated maintenance revenue
and professional service revenue will depend on continued use of mainframes.
Recently there has been a trend away from the use of centralized mainframes in
enterprise computing environments to more decentralized client/server networks.
Although some IT organizations are using mainframes as large enterprise servers,
this practice is relatively new and still emerging and may not continue.
20
<PAGE>
OUR INTRODUCTION OF SERENA SCM PRODUCTS FOR DISTRIBUTED SYSTEMS MAY NOT BE
SUCCESSFUL
We are currently developing our FULL.CYCLE distributed systems product suite
which is designed to operate on distributed systems. If we do not successfully
develop, market, sell and support our FULL.CYCLE distributed systems products,
this would materially adversely affect our business and our future quarterly and
annual operating results. Historically, all of our products have been designed
for the mainframe platform, and substantially all of our software license
revenue, maintenance revenue and professional services revenue to date have been
attributable to licenses for these mainframe products. We do not have
significant experience developing, marketing, selling or supporting distributed
systems products. Developing, marketing and selling our distributed systems
products will require significant resources that we may not have. Our sales and
marketing organizations have historically focused exclusively on sales of our
products for the mainframe and have limited experience marketing and selling
distributed systems products. Additionally, we do not have any experience in
providing support services for distributed systems products. Competition for
experienced software engineers, sales personnel and support staff is intense and
if we fail to attract qualified personnel this would impair our ability to
support our FULL.CYCLE distributed systems products. Many of our competitors
have substantially greater experience providing distributed systems compatible
software products than we do, and many also have significantly greater financial
and organizational resources.
WE MAY EXPERIENCE DELAYS IN DEVELOPING OUR PRODUCTS WHICH COULD ADVERSELY AFFECT
OUR BUSINESS
If we are unable, for technological or other reasons, to develop and
introduce new and improved products in a timely manner, this could materially
adversely affect our business and future quarterly and annual operating results.
We have experienced product development delays in new version and update
releases in the past and may experience similar or more significant product
delays in the future. To date, none of these delays has materially affected our
business. Difficulties in product development could delay or prevent the
successful introduction or marketing of new or improved products or the delivery
of new versions of our products to our customers. In particular, we may
experience delays in introducing our FULL.CYCLE product suite for distributed
systems. While we anticipate releasing initial and follow-on versions of our
FULL.CYCLE distributed systems products, other than DETECT+RESOLVE 2.1 which we
released in September 1999, and eCHANGE MAN which we released in June 1999, any
delay in releasing our new distributed systems products or enhancements, for
whatever reason, would impair our revenue growth.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND OUR
ABILITY TO MANAGE THIS GROWTH AND ANY FUTURE GROWTH WILL AFFECT OUR BUSINESS
Our ability to compete effectively and to manage our recent growth, any
future growth and our future quarterly and annual operating results will depend
in part on our ability to implement and expand operational, customer support and
financial control systems and to train and manage our employees. We may not be
able to augment or improve existing systems and controls or implement new
systems and controls in response to future growth, if any. Any failure to manage
growth could materially adversely affect our business. Since the beginning of
fiscal 1998 we have significantly expanded our sales, marketing and professional
service activities. This expansion included our September 1998 acquisition of
Optima which significantly increased the size of our sales, marketing and
professional service organizations. This growth has resulted, and any future
growth will result, in new and increased responsibilities for management
personnel.
WE WILL NEED TO EXPAND OUR DISTRIBUTION CHANNELS IN ORDER TO EXPAND OUR BUSINESS
AND A NUMBER OF FACTORS MAY HINDER OUR ABILITY TO ACCOMPLISH THIS GOAL
If we fail to significantly expand our direct sales and telesales force, our
ability to sell our products into new markets and to increase our product
penetration into our existing markets will be impaired.
21
<PAGE>
Failure to expand our distribution channels through any of these means could
materially adversely affect our business and our future quarterly and annual
operating results. In addition, our ability to achieve revenue growth in future
periods will be heavily dependent on our success in recruiting and training
sufficient direct sales personnel. We continue to significantly expand our
direct sales efforts in North America and Europe and while we are investing, and
plan to continue to invest, substantial resources on this expansion, we have at
times experienced, and expect to continue to experience, difficulty in
recruiting and retaining qualified direct sales personnel. In addition to
expanding our direct sales efforts, we are also currently investing, and we
intend to continue to invest, substantial resources in selling our products
through telesales personnel. We also intend to extend our distribution channels
by partnering with leading helpdesk management, software distribution
application and system framework providers and may also attempt to develop
additional sales and marketing channels through system integrators, original
equipment manufacturers and other partners.
WE WILL NEED TO EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION IN ORDER TO EXPAND
OUR BUSINESS AND A NUMBER OF FACTORS MAY HINDER OUR ABILITY TO ACCOMPLISH THIS
GOAL
Our existing professional services and customer support organizations may
not be sufficient to manage any future growth in our business. The failure to
expand our professional services and customer support organizations could
materially adversely affect our business. While we intend to significantly
expand our professional services and customer support organizations, including
providing these services for both distributed systems and mainframe applications
and systems, we may not be able to do so. Competition for additional qualified
technical personnel to perform these services is intense.
We believe that providing high quality consulting, training, customer
support and education is essential to maintaining our competitive position. If
we are unable to provide comprehensive consulting and support services to our
existing and prospective customers, this may materially adversely affect our
business and ability to sell our products. Consulting services and customer
support are critical to our future success because the market for third party
SCM solutions is still evolving, and many organizations have limited experience
using third party SCM solutions. Customers have only recently begun to look to
third party providers for SCM solutions as the complexity of computer networks
and number of applications has increased.
WE INTEND TO EXPAND OUR INTERNATIONAL OPERATIONS AND MAY ENCOUNTER A NUMBER OF
PROGLEMS IN DOING SO; THERE ARE ALSO A NUMBER OF FACTORS ASSOCIATED WITH
INTERNATIONAL OPERATIONS THAT COULD ADVERSELY AFFECT OUR BUSINESS
EXPANSION OF INTERNATIONAL OPERATIONS. We intend to expand the scope of our
international operations and currently have operations in Canada, the United
Kingdom and Germany. If we are unable to expand our international operations
successfully and in a timely manner, this could materially adversely affect our
business and quarterly and annual operating results. Our continued growth and
profitability will require continued expansion of our international operations,
particularly in Europe. In addition, in fiscal 1999, we intend to open one
additional European office. We have only limited experience in marketing,
selling and supporting our products internationally. Additionally, we do not
have any experience in developing foreign language versions of our products.
Such development may be more difficult or take longer than we anticipate. We may
not be able to successfully market, sell, deliver and support our products
internationally.
RISKS OF INTERNATIONAL OPERATIONS. Our international revenue is
attributable principally to our European operations. Our international
operations are, and any expanded international operations will be, subject to a
variety of risks associated with conducting business internationally that could
materially adversely affect our business and future quarterly and annual
operating results, including the following:
- Difficulties in staffing and managing international operations
22
<PAGE>
- Problems in collecting accounts receivable
- Longer payment cycles
- Fluctuations in currency exchange rates
- Seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world
- Recessionary environments in foreign economies
- Increases in tariffs, duties, price controls or other restrictions on
foreign currencies or trade barriers imposed by foreign countries
FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY
TRANSACTION LOSSES FOR SERENA
A majority of our international business is conducted in foreign currencies,
principally the British Pound Sterling and the German Deutsche Mark.
Fluctuations in the value of foreign currencies relative to the U.S. dollar have
caused and will continue to cause currency transaction gains and losses. We
cannot predict the effect of exchange rate fluctuations upon future quarterly
and annual operating results. We may experience currency losses in the future.
To date, we have not adopted a hedging program to protect SERENA from risks
associated with foreign currency fluctuations.
SERENA IS SUBJECT TO INTENSE COMPETITION IN THE SCM INDUSTRY AND WE EXPECT TO
FACE INCREASED COMPETITION IN THE FUTURE, INCLUDING COMPETITION IN THE SCM FOR
DISTRIBUTED SYSTEMS MARKET
We may not be able to compete successfully against current and/or future
competitors and such inability would materially adversely affect our business,
quarterly and annual operating results and financial condition. The market for
our products is highly competitive and diverse. Moreover, the technology for SCM
products may change rapidly. New products are frequently introduced, and
existing products are continually enhanced. Competition may also result in
changes in pricing policies by SERENA or our competitors which could materially
adversely affect our business and future quarterly and annual operating results.
Competitors vary in size and in the scope and breadth of the products and
services that they offer. Many of our current and potential competitors have
greater financial, technical, marketing and other resources than we do. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements. They may also be able to devote greater
resources to the development, promotion and sale of their products than we can.
EXISTING COMPETITION. We currently face competition from a number of
sources, including:
- Customers' internal IT departments
- Providers of SCM products that compete directly with CHANGE MAN and
COMPAREX such as Computer Associates, IBM and smaller private companies
- Providers of SCM application development programmer productivity and
system management products such as Compuware, IBM and smaller private
companies
FUTURE COMPETITION. We may face competition in the future from established
companies who have not previously entered the mainframe SCM market or from
emerging software companies. Barriers to entry in the software market are
relatively low. Increased competition may materially adversely affect our
business and future quarterly and annual operating results due to price
reductions, reduced gross margins and reduction in market share. Established
companies may not only develop their own mainframe SCM solutions, but they may
also acquire or establish cooperative relationships with our current
competitors, including cooperative relationships between large, established
companies and smaller private companies. Because larger companies have
significant financial and organizational
23
<PAGE>
resources available, they may be able to quickly penetrate the mainframe SCM
market through acquisitions or strategic relationships and may be able to
leverage the technology and expertise of smaller companies and develop
successful SCM products for the mainframe. We expect that the software industry,
in general, and providers of SCM solutions, in particular, will continue to
consolidate. It is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share.
BUNDLING OR COMPATIBILITY RISKS. Our ability to sell our products also
depends, in part, on the compatibility of our products with other third party
products, particularly those provided by IBM.
Developers of these third party products may change their products so that
they will no longer be compatible with our products. These third party
developers may also decide to bundle their products with other SCM products for
promotional purposes. If that were to happen, our business and future quarterly
and annual operating results may be materially adversely affected as we may be
priced out of the market or no longer be able to offer commercially viable
products.
COMPETITION IN THE SCM FOR DISTRIBUTED SYSTEMS MARKET. We anticipate that
we will also face significant competition as we develop, market and sell our
FULL.CYCLE distributed systems products. If we are unable to successfully
penetrate the SCM for distributed systems market, our business and future
quarterly and annual operating results will be materially adversely affected. We
have little experience in developing, selling, marketing or supporting
distributed systems products since predominantly all of our products to date
have been designed to support the mainframe. Penetrating the existing
distributed systems SCM market will be difficult. Competitors in the distributed
systems market include Computer Associates, Rational, Continuus, Mercury
Interactive, Merant, Microsoft, Novadigm, Novell and other smaller private
companies.
REDUCED CUSTOMER FOCUS AND SPENDING ON YEAR 2000 REMEDIATION AND EMU CONVERSION
COULD ADVERSELY AFFECT THE SALES OF OUR PRODUCTS; CUSTOMER USE OF OUR PRODUCTS
FOR YEAR 2000 AND EMU ISSUES MAY NOT LEAD TO INCREASED SALES OF OUR OTHER
PRODUCTS
Our business may be adversely affected if customers focus less on Year 2000
remediation and European Monetary Unit, or EMU, conversion issues and sales of
our STARWARP and COMPAREX products decline as a result. We have derived a
portion of our recent software license revenue and professional services revenue
from products designed to help customers resolve SCM problems for specific
business issues such as those related to Year 2000 remediation and EMU
conversion. Our STARWARP product is our primary Year 2000 and EMU readiness
product. Certain customers have also licensed COMPAREX to assist them in testing
Year 2000 remediations and EMU conversions. Market acceptance of our products
and services will depend, in large part, on whether customers use our products
as part of their overall IT management strategy in addition to using them to
resolve SCM problems related to specific business issues. Market acceptance of
our products to address general IT business needs as well as to resolve specific
business issues, such as Year 2000 remediation or EMU conversion, is critical to
our business and future success. If customers do not expand their use of our
products, implement new software products introduced by us or do not use our
related maintenance and support services to address their general IT business
requirements as well as specific issues, this will materially adversely affect
our business and our ability to sell our products.
ANY DELAYS IN OUR NORMALLY LENGTHY SALES CYCLES COULD RESULT IN SIGNIFICANT
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
Our sales cycle typically takes six to 18 months to complete and varies from
product to product. Any delay in the sales cycle of a large license or a number
of smaller licenses could result in significant fluctuations in our quarterly
operating results. The length of the sales cycle may vary depending on a number
of factors over which we may have little or no control, including the size of a
potential
24
<PAGE>
transaction and the level of competition that we encounter in our selling
activities. Additionally, the emerging market for SCM products and services
contributes to the lengthy sales process in that during the sales cycle we often
have to teach potential customers about the use and benefits of our products. In
certain circumstances, we license our software to customers on a trial basis to
assist the customers in their evaluation of our products. Our sales cycle can be
further extended for product sales made through third party distributors.
CERTAIN OF OUR PRODUCTS ARE LICENSED FROM THIRD PARTIES OR ARE JOINTLY-OWNED
WITH THIRD PARTIES; OUR FAILURE TO MAINTAIN THESE ARRANGEMENTS WITH THIRD
PARTIES COULD ADVERSELY AFFECT OUR BUSINESS
STARTOOL AND STARWARP. We license our STARTOOL and STARWARP products on an
exclusive worldwide basis from A. Bruce Leland, one of our employees. The
termination of our licenses for the STARTOOL or STARWARP products would
materially adversely affect our business and quarterly and annual operating
results. Mr. Leland holds all proprietary rights with respect to the STARTOOL
and STARWARP technology, including any derivative works or enhancements of the
existing STARTOOL and STARWARP products. Our licenses for these products are
terminable by Mr. Leland upon 30 days notice in the event certain conditions
occur, including our failure to pay sublicense fees to Mr. Leland on a timely
basis or any other material breach by us of the license agreement. Should the
licenses for the STARTOOL and STARWARP products terminate, we may not be able to
replace these products which could materially adversely affect our business and
future quarterly and annual operating results.
DETECT+RESOLVE MAINFRAME. We share ownership rights in our DETECT+RESOLVE
MAINFRAME technology for mainframe platforms with High Power Software. Although
we have historically had primary responsibility for marketing, licensing and
supporting DETECT+RESOLVE MAINFRAME, High Power Software has the ability to
jointly direct these efforts. If in the future we are unable to reach agreement
with High Power Software on the direction or evolution of the product, our
ability to market or promote the product may be compromised. This could have a
material adverse effect on our business and future quarterly and annual
operating results.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND SUCH OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH SERENA IN THE FUTURE
Our success will depend to a significant extent on the continued service of
our senior executives and certain other key employees, including certain sales,
consulting, technical and marketing personnel. If we lost the services of one or
more of our executives or key employees, including if one or more of our
executives or key employees decided to join a competitor or otherwise compete
directly or indirectly with SERENA, this could materially adversely affect our
business. In particular, we have historically relied on the experience and
dedication of our product authors. With the exception of Douglas D. Troxel,
SERENA's founder, Chief Technology Officer and Chairman of SERENA's board of
directors, the employment of all of our senior and key employees, including key
product authors, is at will. Mr. Troxel's employment is on a year-to-year basis.
In addition, we do not maintain key man life insurance on our employees and have
no plans to do so.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED
Our future success will likely depend in large part on our ability to
attract and retain additional experienced sales, technical, marketing and
management personnel. In addition, we will need to attract and retain sufficient
numbers of qualified software engineers, as well as sales and marketing and
support personnel, and successfully develop, market and support our FULL.CYCLE
distributed systems product suite which is currently in development. Competition
for such personnel in the computer software industry is intense, and in the past
we have experienced difficulty in recruiting qualified personnel, especially
developers and sales personnel. We expect competition for qualified personnel to
25
<PAGE>
remain intense, and we may not succeed in attracting or retaining such
personnel. If we do not, this could materially adversely affect our business and
future quarterly and annual operating results. In addition, new employees
generally require substantial training in the use of our products. This training
will require substantial resources and management attention.
INTERNATIONAL OPERATIONS. We intend to expand the scope of our
international operations and these plans will require us to attract experienced
management, service, marketing, sales and support personnel for our
international offices. Competition for such personnel is intense, and we may not
be able to attract or retain such experienced personnel.
NON-U.S. CITIZENS WORKING IN THE UNITED STATES. To achieve our business
objectives, we may recruit and employ skilled technical professionals from other
countries to work in the United States. Limitations imposed by federal
immigration laws and the availability of visas could materially adversely affect
our ability to attract necessary qualified personnel. This may have a material
adverse effect on our business and future quarterly and annual operating
results.
POTENTIAL YEAR 2000 PROBLEMS WITH OUR SOFTWARE OR OUR INTERNAL OPERATING SYSTEMS
COULD ADVERSELY AFFECT OUR BUSINESS
SERENA SOFTWARE. If any of our licensees experience Year 2000 problems as a
result of their use of our software products, those licensees could assert
claims for damages which, if successful, could materially adversely affect our
business, future operating results and financial condition. In the ordinary
course of our business, we test and evaluate our software products. We believe
that our software products are generally Year 2000 compliant, meaning that the
use or occurrence of dates on or after January 1, 2000 will not materially
affect the performance of our software products or the ability of our products
to correctly create, store, process and output information. However, we may
learn that certain of our software products do not contain all necessary
software routines and codes necessary for the accurate calculation, display,
storage and manipulation of data involving dates. In addition, in certain cases,
we have warranted that the use or occurrence of dates on or after January 1,
2000 will not adversely affect the performance of our products with respect to
four digit date dependent data or the ability to create, store, process and
output information related to such data.
THIRD PARTY EQUIPMENT AND SOFTWARE. We use third party equipment and
software that may not be Year 2000 compliant. If this third party equipment or
software does not operate properly with regard to the Year 2000, we may incur
unexpected expenses to remedy any problems. These costs may materially adversely
affect our business. In addition, if our key systems, or a significant number of
our systems, failed as a result of Year 2000 problems we could incur substantial
costs and disruption of our business.
CUSTOMER BUYING PATTERNS. In addition, the purchasing patterns of our
customers and potential customers may be affected by Year 2000 issues. Many
companies are spending significant resources to correct their current software
systems for Year 2000 compliance. Sales of certain of our products, in
particular STARWARP and COMPAREX have benefited from increased customer spending
on Year 2000 readiness. Customers with limited IT budgets who face material Year
2000 issues are spending their limited resources remediating these Year 2000
problems instead of investing in more general IT products, such as CHANGE MAN.
For a more detailed description of our Year 2000 preparedness assessment,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
OUR INDUSTRY CHANGES RAPIDLY DUE TO EVOLVING TECHNOLOGY STANDARDS AND OUR FUTURE
SUCCESS WILL DEPEND ON OUR ABILITY TO CONTINUE TO MEET THE SOPHISTICATED NEEDS
OF OUR CUSTOMERS
Our future success will depend on our ability to address the increasingly
sophisticated needs of our customers by supporting existing and emerging
hardware, software, database and networking platforms.
26
<PAGE>
We will have to develop and introduce enhancements to our existing products and
new products on a timely basis to keep pace with technological developments,
evolving industry standards and changing customer requirements. We expect that
we will have to respond quickly to rapid technological change, changing customer
needs, frequent new product introductions and evolving industry standards that
may render existing products and services obsolete. As a result, our position in
existing markets or potential markets could be eroded rapidly by product
advances. The life cycles of our products are difficult to estimate. Our growth
and future financial performance will depend in part upon our ability to enhance
existing applications, develop and introduce new applications that keep pace
with technological advances, meet changing customer requirements and respond to
competitive products. We expect that our product development efforts will
continue to require substantial investments. We may not have sufficient
resources to make the necessary investments. Any of these events could have a
material adverse effect on our business, quarterly and annual operating results
and financial condition.
THIRD PARTIES IN THE FUTURE COULD ASSERT THAT OUR PRODUCTS INFRINGE THEIR
INTELLECTUAL PROPERTY RIGHTS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS; THERE
COULD BE POTENTIAL ADVERSE EFFECTS OF THE PENDING COMPUWARE CLAIM
Third parties may claim that our current or future products infringe their
proprietary rights. Any claims of this type could affect our relationships with
existing customers and may prevent future customers from licensing our products.
Because we are dependent upon a limited number of products, any such claims,
with or without merit, could be time consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Royalty or license agreements may not be available on acceptable
terms or at all. We expect that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in the
software industry segment grows and the functionality of products in different
industry segments overlaps. As a result of these factors, infringement claims
could materially adversely affect our business.
In September 1998, Compuware Corporation, or Compuware, filed suit against
SERENA in the United States District Court for the Eastern District of Michigan
seeking unspecified compensatory damages, costs and attorneys fees, and
injunctive relief based on allegations of copyright infringement, trade secret
misappropriation and various tort claims related to the sale of our STARTOOL and
STARWARP products. Compuware served the complaint on SERENA in November 1998.
Due to the nature of litigation generally, and due to the fact that discovery is
ongoing, management cannot ascertain the availability of injunctive relief or
other equitable remedies or estimate the total expenses, possible damages or
settlement value, if any, that may ultimately be incurred in connection with
Compuware's suit. However, management believes, based on the advice of counsel,
that SERENA has meritorious defenses to the allegations contained in Compuware's
complaint. We believe that this matter will not have a material adverse effect
on our results of operations or financial condition. This litigation could be
time consuming and costly, and there can be no assurance that SERENA will
necessarily prevail given the inherent uncertainties of litigation. In the event
that we do not prevail in litigation, we could be prevented from selling our
STARTOOL and STARWARP products or be required to enter into royalty or licensing
agreements or pay monetary damages. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to SERENA or at all. In the
event of a successful claim against us, our business, future operating results
or financial condition could be materially adversely affected.
ERRORS IN OUR PRODUCTS OR THE FAILURE OF OUR PRODUCTS TO CONFORM TO
SPECIFICATIONS COULD RESULT IN OUR CUSTOMERS DEMANDING REFUNDS FROM US OR
ASSERTING CLAIMS FOR DAMAGES AGAINST US
Because our software products are complex, they often contain errors or
"bugs" that can be detected at any point in a product's life cycle. While we
continually test our products for errors and
27
<PAGE>
work with customers through our customer support services to identify and
correct bugs in our software, we expect that errors in our products will
continue to be found in the future. Although many of these errors may prove to
be immaterial, certain of these errors could be significant. Detection of any
significant errors may result in, among other things, loss of, or delay in,
market acceptance and sales of our products, diversion of development resources,
injury to our reputation, or increased service and warranty costs. These
problems could materially adversely affect our business and future quarterly and
annual operating results. In the past we have discovered errors in certain of
our products and have experienced delays in the shipment of our products during
the period required to correct these errors. These delays have principally
related to new version and product update releases. To date none of these delays
have materially affected our business. However, product errors or delays in the
future, including any product errors or delays associated with the introduction
of our FULL.CYCLE distributed systems products, could be material. In addition,
in certain cases we have warranted that our products will operate in accordance
with specified customer requirements. If our products fail to conform to such
specifications, customers could demand a refund for the software license fee
paid to us or assert claims for damages.
PRODUCT LIABILITY CLAIMS ASSERTED AGAINST US IN THE FUTURE COULD ADVERSELY
AFFECT OUR BUSINESS
We may be subject to claims for damages related to product errors in the
future. While we carry insurance policies covering this type of liability, these
policies may not provide sufficient protection should a claim be asserted. A
material product liability claim could materially adversely affect our business.
Our license agreements with our customers typically contain provisions designed
to limit exposure to potential product liability claims. SERENA's standard
software licenses provide that if our products fail to perform, we will correct
or replace such products. If these corrective measures fail, we may be required
to refund the license fee for such non-performing product. However, our standard
license agreement limits our liability for non-performing products to the amount
of license fee paid, if the license has been in effect for less than one year,
or to the amount of the licensee's current annual maintenance fee, if the
license is more than one year old. Our standard license also provides that
SERENA shall not be liable for indirect or consequential damages caused by the
failure of our products. Such limitation of liability provisions may, however,
not be effective under the laws of certain jurisdictions to the extent local
laws treat certain warranty exclusions as unenforceable. Although we have not
experienced any product liability claims to date, the sale and support of our
products entail the risk of such claims. In particular, issues relating to Year
2000 compliance have increased awareness of the potential adverse effects of
software defects and malfunctions.
ANY ACQUISITIONS OR INVESTMENTS THAT WE MAY MAKE WILL BE SUBJECT TO A NUMBER OF
FACTORS WHICH COULD ADVERSELY AFFECT OUR BUSINESS; SUCH INVESTMENTS OR
ACQUISITIONS MAY DILUTE EXISTING STOCKHOLDERS
In the future we may make acquisitions of, or large investments in,
businesses that offer products, services and technologies that we believe would
help us better provide SCM products and services or help us expand our
distribution channels. We may not be able to complete any such additional
acquisitions in the future. Any future acquisitions or investments would present
risks commonly encountered in acquisitions of businesses. The following are
examples of such risks:
- Difficulty in combining the technology, operations or work force of the
acquired business
- Disruption of SERENA's on-going businesses
- Difficulty in realizing the potential financial or strategic benefits of
the transaction
- Difficulty in maintaining uniform standards, controls, procedures and
policies
28
<PAGE>
- Possible impairment of relationships with employees and clients as a
result of any integration of new businesses and management personnel
We expect that future acquisitions, if any, could provide for consideration
to be paid in cash, shares of SERENA common stock, or a combination of cash and
SERENA common stock. If the consideration for such transaction is paid in common
stock, this would further dilute existing stockholders. Any amortization of
goodwill or other assets resulting from such acquisition transaction could
materially impair our operating results and financial condition. If an
acquisition or large investment were to take place, the risks described above
could materially adversely affect our business and future operating results.
OUR STOCK WILL LIKELY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS
DUE TO A NUMBER OF FACTORS, CERTAIN OF WHICH ARE BEYOND OUR CONTROL
Stock prices and trading volumes for many technology companies fluctuate
widely for reasons which may be unrelated to their businesses or results of
operations. These fluctuations, as well as general economic, market and
political conditions, could materially adversely affect the market price of
SERENA's common stock.
Future announcements concerning SERENA or our competitors could cause the
market price of the common stock to fluctuate greatly. These type of
announcements may include information concerning:
- Any shortfall in SERENA's revenues or net income from revenues or net
income expected by securities analysts
- Announcements of new products by SERENA or our competitors, including
announcements regarding our FULL.CYCLE distributed systems products
- Quarterly fluctuations in our financial results or the results of other
software companies, including those of our direct competitors
- Changes in analysts' estimates of our financial performance, the financial
performance of our competitors, or the financial performance of software
companies in general
- Changes in prices of our products or the products of our competitors
- Changes in our revenue growth rates or the growth rates of our competitors
- Sales of large blocks of SERENA common stock
- Conditions in the financial markets in general and the software industry
in particular
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not use derivative financial instruments in our investment portfolio
and have no foreign exchange contracts. Our financial instruments consist of
cash, cash equivalents, short-term investments, trade accounts receivable, and
accounts payable. Our exposure to market risk for changes in interest rates
relates primarily to our short-term investments and obligations; thus,
fluctuations in interest rates would not have a material effect on the fair
value of these securities since their duration is short.
Sales to customers in foreign countries accounted for approximately 13% and
16% of total revenue during the quarter and nine months ended October 31, 1999,
respectively. Because we invoice certain of these sales in currencies other than
the U.S. dollar, predominately the British Pound Sterling and the German
Deutsche Mark, and do not hedge these transactions, fluctuations in exchange
rates could adversely affect the translated results of operations of our foreign
subsidiaries.
29
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
In February 1999, SERENA completed the sale of 6 million shares of its
Common Stock, including 2 million shares on behalf of selling stockholders, at a
per share price of $13.00 in a firm commitment underwritten public offering
pursuant to a Registration Statement on Form S-1 (File No. 333-67761) which the
Securities and Exchange Commission declared effective on February 11, 1999. The
offering was underwritten by Hambrecht & Quist LLC, SG Cowen Securities
Corporation and Soundview Technology Group Inc. In March 1999, an over-allotment
option granted by SERENA to the underwriters for the purchase of up to 900,000
additional shares of SERENA Common Stock was exercised in full by the
underwriters.
SERENA received aggregate gross proceeds of $63.7 million in connection with
its initial public offering. Of such amount, approximately $4.4 million was paid
to the underwriters in connection with underwriting discounts, and approximately
$1.4 million was paid by SERENA in connection with offering expenses, including
legal, accounting, printing, filing and other fees. There were no direct or
indirect payments to directors or officers of the Company or any other person or
entity. None of the offering proceeds have been used for the construction of
plant, buildings or facilities or other purchase or installation of machinery or
equipment or for purchases of real estate or the acquisition of other
businesses. The Company is currently investing the net offering proceeds for
future use as additional working capital. Such remaining net proceeds may be
used for potential strategic investments or acquisitions that complement
SERENA's products, services, technologies or distribution channels.
On June 14, 1999, SERENA acquired Diamond Optimum Systems, Inc. ("Diamond"),
a provider of enterprise software change management solutions for NT and UNIX
environments, in a transaction valued at approximately $4.0 million. The Company
acquired all the assets and assumed all the liabilities of Diamond in exchange
for cash totaling $1.75 million and the issuance of 175,000 shares of the
Company's common stock valued at $12.77 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION.
In August 1999, SERENA's Board of Directors authorized the institution of a
stock repurchase program whereby up to 400,000 shares of the Company's Common
Stock may be repurchased in the open market or in privately negotiated block
transactions from time to time. The Company will utilize the reacquired shares
for reissuance in connection with employee stock programs and general corporate
purposes. Cumulatively to date through October 31, 1999, the Company has
repurchased 22,500 shares of its own common stock at an average per share price
of $16.17.
30
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
- --------------------- -------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
October 31, 1999.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
SERENA SOFTWARE, INC.
By: /s/ ROBERT I. PENDER, JR.
-----------------------------------------
Robert I. Pender, Jr.
VICE PRESIDENT, FINANCE AND
ADMINISTRATION, CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER) AND SECRETARY
Date: December 15, 1999
</TABLE>
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10Q QUARTERLY REPORT UNDER THE SECURITIES ACT OF 1934 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 65,092,113
<SECURITIES> 26,741,261
<RECEIVABLES> 14,747,482
<ALLOWANCES> 840,000
<INVENTORY> 0
<CURRENT-ASSETS> 107,591,259
<PP&E> 2,267,358
<DEPRECIATION> 0
<TOTAL-ASSETS> 132,363,626
<CURRENT-LIABILITIES> 22,259,583
<BONDS> 0
0
0
<COMMON> 25,416
<OTHER-SE> 107,669,370
<TOTAL-LIABILITY-AND-EQUITY> 132,363,626
<SALES> 26,691,087
<TOTAL-REVENUES> 51,033,027
<CGS> 2,071,094
<TOTAL-COSTS> 38,355,054
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,929,985
<INCOME-TAX> 7,296,584
<INCOME-CONTINUING> 8,633,401
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,633,401
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.34
</TABLE>
