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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 APRIL 30, 2000
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 Identification No.)
incorporation or organization)
</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 April 30, 2000 was 39,276,394.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of April 30, 2000
and January 31, 2000...................................... 3
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three Months Ended April 30,
2000 and 1999............................................. 4
Condensed Consolidated Statements of Cash Flows for The
Three Months Ended April 30, 2000 and 1999................ 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 9
Item 3 Quantitative and Qualitative Disclosures About Market
Risk...................................................... 24
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................... 25
Item 2 Change in Securities and Use of Proceeds.................... 25
Item 3 Defaults Upon Senior Securities............................. 25
Item 4 Submission of Matters to a Vote of Security Holders......... 25
Item 5 Other Information........................................... 25
Item 6 Exhibits and Reports on Form 8-K............................ 25
Signatures.................................................. 26
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SERENA SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
2000 2000
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 85,270,270 $ 80,930,648
Short-term investments.................................... 25,789,033 20,213,259
Accounts receivable, net of allowance of $1,208,367 and
$983,367 at April 30 and January 31, 2000,
respectively............................................ 14,469,750 15,380,341
Deferred taxes............................................ 1,818,313 1,818,313
Prepaid expenses and other current assets................. 1,311,195 595,040
------------ ------------
Total current assets.................................... 128,658,561 118,937,601
Long-term investments....................................... -- 3,041,650
Property and equipment, net................................. 2,455,046 2,419,871
Deferred taxes.............................................. 1,927,822 1,927,822
Intangible assets, net...................................... 22,076,083 22,612,525
Other assets................................................ 128,193 119,327
------------ ------------
TOTAL ASSETS............................................ $155,245,705 $149,058,796
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 308,894 $ 365,771
Income taxes payable...................................... 4,081,197 3,000,485
Accrued expenses.......................................... 10,086,345 11,307,366
Deferred revenue.......................................... 15,776,646 14,632,947
------------ ------------
Total current liabilities............................... 30,253,082 29,306,569
Deferred revenue, net of current portion.................... 4,760,993 4,391,827
Deferred taxes.............................................. 836,093 836,093
------------ ------------
Total liabilities....................................... 35,850,168 34,534,489
------------ ------------
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; 39,276,394 and 38,285,612 shares issued and
outstanding at April 30 and January 31, 2000,
respectively............................................ 39,276 38,286
Additional paid-in capital................................ 105,452,094 89,280,527
Deferred stock-based compensation......................... (296,931) (380,790)
Notes receivable from stockholders........................ (19,172,876) (3,181,875)
Accumulated other comprehensive losses.................... (145,838) (40,014)
Retained earnings......................................... 33,519,812 28,808,173
------------ ------------
Total stockholders' equity.............................. 119,395,537 114,524,307
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $155,245,705 $149,058,796
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SERENA SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Revenue:
Software licenses......................................... $11,613,020 $ 6,908,607
Maintenance............................................... 8,362,374 5,294,079
Professional services..................................... 1,179,897 2,018,070
----------- -----------
Total revenue........................................... 21,155,291 14,220,756
----------- -----------
Cost of revenue:
Software licenses......................................... 463,604 688,859
Maintenance............................................... 1,649,757 1,335,083
Professional services..................................... 1,065,099 1,557,041
----------- -----------
Total cost of revenue................................... 3,178,460 3,580,983
----------- -----------
Gross profit............................................ 17,976,831 10,639,773
----------- -----------
Operating expenses:
Sales and marketing....................................... 6,341,486 4,262,815
Research and development.................................. 2,007,810 1,366,357
General and administrative................................ 2,565,910 1,100,801
Stock-based compensation.................................. 83,859 314,814
Amortization of intangible assets......................... 536,442 502,441
----------- -----------
Total operating expenses................................ 11,535,507 7,547,228
----------- -----------
Operating income............................................ 6,441,324 3,092,545
Interest and other income, net.............................. 1,781,024 835,228
----------- -----------
Income before income taxes................................ 8,222,348 3,927,773
Income taxes................................................ 3,510,709 1,733,551
----------- -----------
Net income................................................ 4,711,639 2,194,222
Other comprehensive income (loss)........................... (105,824) 22,743
----------- -----------
Comprehensive income...................................... $ 4,605,815 $ 2,216,965
=========== ===========
Net income per share:
Basic..................................................... $ 0.12 $ 0.06
=========== ===========
Diluted................................................... $ 0.12 $ 0.06
=========== ===========
Weighted average shares used in per share calculations:
Basic..................................................... 37,972,148 35,203,649
=========== ===========
Diluted................................................... 39,783,602 37,336,122
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SERENA SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
------------------------------
2000 1999
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 4,711,639 $ 2,194,222
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 254,218 184,462
Increase in allowance for bad debts................... 225,000 74,854
Accrued interest on notes receivable.................. (247,879) (46,740)
Amortization of deferred stock-based compensation..... 83,859 314,814
Amortization of intangible assets..................... 536,442 502,441
Changes in operating assets and liabilities:
Accounts receivable................................. 810,194 1,562,585
Prepaid expenses and other assets................... (721,324) (323,564)
Accounts payable.................................... (62,783) (251,635)
Income taxes payable................................ 1,074,649 (1,099,891)
Accrued expenses.................................... (1,251,849) (365,301)
Deferred revenue.................................... 1,416,760 1,958,887
----------- ------------
Net cash provided by operating activities......... 6,828,926 4,705,134
----------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment....................... (280,347) (135,674)
Purchases of short-term and long-term investments......... (2,567,486) (23,440,894)
Payment of accrued interest and principal on notes
receivable.............................................. 75,879 --
Payment of notes due from stockholder..................... -- 616,769
----------- ------------
Net cash used in investing activities............. (2,771,954) (22,959,799)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................. -- 57,902,226
Exercise of stock options under the employee stock option
plan.................................................... 355,112 --
----------- ------------
Net cash provided by financing activities......... 355,112 57,902,226
----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (72,462) 22,743
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 4,339,622 39,670,304
Cash and cash equivalents at beginning of period............ 80,930,648 21,468,740
----------- ------------
Cash and cash equivalents at end of period.................. $85,270,270 $ 61,139,044
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid......................................... $ 2,351,564 $ 2,854,357
=========== ============
NONCASH INVESTING AND FINANCING ACTIVITY:
Restricted stock issued in exchange for notes
receivable.............................................. $15,819,001 $ --
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SERENA Software, Inc. (the "Company") is an industry-leading supplier of
eBusiness infrastructure change management solutions. Its principal markets are
North America and Europe.
The accompanying unaudited condensed 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, 2000. The interim results presented are not necessarily indicative
of results for any subsequent quarter or for the fiscal year ending January 31,
2001.
(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
APRIL 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Basic net income per share--weighted average number
of unrestricted common shares outstanding.......... 37,972,148 35,203,649
Effect of potentially dilutive securities
outstanding--restricted stock and options.......... 1,811,454 2,132,473
---------- ----------
Shares used in diluted net income per share
computation........................................ 39,783,602 37,336,122
========== ==========
</TABLE>
(2) STOCKHOLDERS' EQUITY
On March 13, 2000, the Company announced that its Board of Directors
approved a three-for-two split of the Company's outstanding shares of Common
Stock. The stock split was effected in the form of a stock dividend that
entitled each stockholder of record, at the close of business on March 21, 2000,
to receive one additional share of Common Stock for every two shares of Common
Stock held. The stock dividends resulting from the stock split were distributed
by the transfer agent on March 29, 2000. The accompanying financial statements
have been retroactively restated to reflect the effect of this stock split.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging
6
<PAGE>
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
activities. This statement becomes effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. In June 1999, the FASB issued Statement of
Financial Accounting Standard No. 137 "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS--DEFERRAL OF THE EFFECTIVE DATE OF SFAS STATEMENT NO. 133"
("SFAS 137"). SFAS 137 defers the effective date of SFAS 133 until February 1,
2001. The Company will adopt SFAS 133 in fiscal 2001. The Company does not have
any derivative financial instruments and expects the adoption of SFAS 133 will
not affect results of operations.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-9, "MODIFICATION OF SOP 97-2, SOFTWARE
REVENUE RECOGNITION WITH RESPECT TO CERTAIN TRANSACTIONS." SOP 98-9 amends
SOP 97-2 to require the entity to recognize revenue for multiple element
arrangements by means of the "residual method" when: (1) there is
vendor-specific evidence of the fair values of all of the undelivered elements;
(2) vendor-specific evidence of fair value does not exist for one or more of the
delivered elements; and (3) the revenue recognition criteria of SOP 97-2 are
satisfied. SOP 98-9 became effective February 1, 2000. The Company adopted
SOP 98-9 on February 1, 2000 without any material effect on its results of
operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "REVENUE RECOGNITION IN FINANCIAL
STATEMENTS." SAB 101 provides guidance for revenue recognition under certain
circumstances. In March 2000, the SEC issued SAB No. 101A to defer for one
quarter the implementation of SAB No. 101 with earlier application encouraged.
The Company is required to adopt SAB No. 101 in the second quarter of fiscal
2001. The SEC has recently indicated it intends to issue further guidance with
respect to adoption of specific issues addressed by SAB No. 101. Until such time
as this additional guidance is issued, the Company is unable to assess the
impact, if any, it may have on its financial position or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION--AN INTERPRETATION OF APB OPINION NO. 25." This interpretation
provides guidance for applying APB No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES." This interpretation has provisions that are effective on staggered
dates, some of which began after December 15, 1998 and others that become
effective after July 31, 2000. The adoption of this interpretation did not and
will not have a material impact on the financial statements.
(4) ISSUANCE OF RESTRICTED STOCK
On February 16, 2000 and under the Company's 1997 Stock Option and Incentive
Plan, SERENA issued 817,500 shares of restricted common stock to certain
officers of the Company at $19.33 per share in exchange for promissory notes.
Restrictions lapse over four years based on the individual's continued
employment. In the event an employee is terminated, the Company has the right to
repurchase, for a price equal to the individual's original purchase price, any
remaining restricted shares held by the individual. There was no deferred
stock-based compensation recorded in connection with this restricted stock
issuance.
7
<PAGE>
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) SUBSEQUENT EVENT
On May 1, 2000, the Company acquired High Power Software, Inc. ("HPS"), a
company to which we shared ownership rights in our DETECT+RESOLVE MAINFRAME
technology for mainframe platforms. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the results of operations of HPS
will be included in the Company's consolidated financial statements from May 1,
2000. The Company acquired all the assets and assumed all the liabilities of HPS
in exchange for cash of $1.4 million and the issuance of 91,954 shares of the
Company's common stock valued at $19.97 per share. The transaction was valued at
approximately $3.6 million.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. CERTAIN STATEMENTS UNDER THE CAPTIONS "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
ELSEWHERE IN THIS REPORT ARE "FORWARD-LOOKING STATEMENTS." THESE FORWARD-LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS ABOUT OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER STATEMENTS CONTAINED IN THIS
REPORT THAT ARE NOT HISTORICAL FACTS. WHEN USED IN THIS REPORT, THE WORDS
"EXPECTS," "ANTICIPATES," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES"
AND SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING
STATEMENTS, INCLUDING OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND
OTHER FACTORS DISCUSSED UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS REPORT.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE BUT ARE NOT
LIMITED TO, OUR RELIANCE ON OUR MAINFRAME PRODUCTS FOR REVENUE, CHANGES IN
REVENUE MIX AND SEASONALITY, OUR ABILITY TO DELIVER OUR PRODUCTS ON THE
DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE ON REVENUES FROM OUR INSTALLED BASE,
EXPANSION OF OUR PROFESSIONAL SERVICES AND INTERNATIONAL ORGANIZATIONS AND OUR
ABILITY TO MANAGE OUR GROWTH. WE ASSUME NO OBLIGATION TO UPDATE THE
FORWARD-LOOKING INFORMATION CONTAINED IN THIS REPORT. IT IS IMPORTANT THAT THE
DISCUSSION BELOW BE READ TOGETHER WITH THE ATTACHED CONDENSED 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 2000.
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 condensed consolidated statements of income
and comprehensive income for the three months ended April 30, 2000 to the
condensed consolidated statements of income and comprehensive income for the
three months ended April 30, 1999. These results include the results of Diamond
Optimum Systems, Inc. ("DIAMOND") from June 14, 1999, the date our acquisition
of DIAMOND was completed.
9
<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
THREE MONTHS
ENDED
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Revenue:
Software licenses......................................... 54.9% 48.6%
Maintenance............................................... 39.5% 37.2%
Professional services..................................... 5.6% 14.2%
----- -----
TOTAL REVENUE........................................... 100.0% 100.0%
----- -----
Cost of revenue:
Software licenses......................................... 2.2% 4.8%
Maintenance............................................... 7.8% 9.4%
Professional services..................................... 5.0% 11.0%
----- -----
TOTAL COST OF REVENUE................................... 15.0% 25.2%
----- -----
GROSS PROFIT............................................ 85.0% 74.8%
----- -----
Operating expenses:
Sales and marketing....................................... 30.0% 30.0%
Research and development.................................. 9.5% 9.6%
General and administrative................................ 12.1% 7.8%
Stock-based compensation.................................. 0.4% 2.2%
Amortization of intangible assets......................... 2.5% 3.5%
----- -----
TOTAL OPERATING EXPENSES................................ 54.5% 53.1%
----- -----
OPERATING INCOME............................................ 30.5% 21.7%
Interest and other income, net.............................. 8.4% 5.9%
----- -----
Income before income taxes.................................. 38.9% 27.6%
Income taxes................................................ 16.6% 12.2%
----- -----
NET INCOME.............................................. 22.3% 15.4%
===== =====
</TABLE>
REVENUE
We derive revenue from software licenses, maintenance and professional
services. Our total revenue increased $7.0 million or 49% to $21.2 million in
the current fiscal quarter ended April 30, 2000 from $14.2 million in the same
quarter a year ago.
SOFTWARE LICENSES. Software licenses revenue as a percentage of total
revenue was 55% in the current fiscal quarter ended April 30, 2000 as compared
to 49% in the same quarter a year ago. Software licenses revenue increased $4.7
million or 68% to $11.6 million in the current fiscal quarter from $6.9 million
in the same quarter a year ago. 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 party SCM solutions, fueled
by new IT initiatives around the internet, eCommerce and the webification of
legacy systems. To a lesser extent, an increase in sales force productivity and
personnel, the introduction of our distributed system product, ECHANGE MAN in
the second half of fiscal 2000, and software license price increases have all
contributed to the dollar
10
<PAGE>
increase. In particular, sales of our CHANGE MAN product grew significantly,
with an increase in aggregate of 225% when comparing the current fiscal quarter
ended April 30, 2000 to the same quarter from a year ago. CHANGE MAN, STARTOOL
and COMPAREX continue to make up a significant portion of total licenses
revenue. Those products accounted for $10.4 million or 90% of total software
licenses revenue in the current fiscal quarter as compared to $6.4 million or
93% in the same quarter a year ago.
MAINTENANCE. Maintenance revenue as a percentage of total revenue was 40%
in the current fiscal quarter ended April 30, 2000 as compared to 37% in the
same quarter a year ago. Maintenance revenue increased $3.1 million or 58% to
$8.4 million in the current fiscal quarter from $5.3 million in the same quarter
a year ago. The dollar increase reflects both growth in software licenses
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.
PROFESSIONAL SERVICES. Professional services revenue was 6% of total
revenue in the current fiscal quarter ended April 30, 2000 as compared to 14% in
the same quarter a year ago. Professional services revenue decreased $0.8
million or 42% to $1.2 million in the current fiscal quarter from $2.0 million
in the same quarter a year ago. The dollar decrease is attributable to certain
of our customers putting projects on hold in order to address their remediation,
testing and other activities associated with becoming Year 2000 compliant and a
delay in closing professional services contracts with a significant customer.
The decrease in professional services revenue as a percentage of total revenue
was, in addition to the above, also attributable to strong revenue growth in
software licenses and maintenance.
COST OF REVENUE
Cost of revenue, which consists of cost of software licenses, cost of
maintenance and cost of professional services, was $3.2 million or 15% of total
revenue in the current fiscal quarter ended April 30, 2000 as compared to $3.6
million or 25% in the same quarter a year ago. The decreases in both absolute
dollar terms and as a percentage of total revenue, when comparing the current
fiscal quarter ended April 30, 2000 to the same quarter a year ago, are
predominantly the result of growth in higher margin software licenses revenue
exceeding the other categories of lower margin revenue. Margin improvements in
both software licenses and maintenance offset a margin decline in professional
services.
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 4% in the current fiscal quarter ended April 30, 2000 as
compared to 10% in the same quarter a year ago. Cost of software licenses
decreased $0.2 million or 33% to $0.5 million in the current fiscal quarter from
$0.7 million in the same quarter a year ago. The decrease, both in absolute
dollar terms and as a percentage of total software licenses revenue, is
attributable to decreases in royalty bearing software licenses, predominantly
from STARTOOL, as a percentage of total software licenses revenue.
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 20% in the current fiscal quarter as compared to 25% in
the same quarter a year ago. Cost of maintenance increased $0.3 million or 24%
to $1.6 million in the current fiscal quarter from $1.3 million in the same
quarter a year ago. The dollar increase is predominantly 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. Cost
of maintenance as a percentage of total maintenance
11
<PAGE>
revenue decreased as the rate of increase in maintenance revenue was greater
than the rate of increase in costs associated with our customer support
organization.
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 90% in the current fiscal quarter as compared
to 77% in the same quarter a year ago. Cost of professional services decreased
$0.5 million or 32% to $1.1 million in the current fiscal quarter from $1.6
million in the same quarter a year ago. The absolute dollar decrease is due to
reducing the use of outside independent contractors and reallocating
professional services resources to other parts of our organization as a result
of our customers putting projects on hold to address issues associated with
becoming Year 2000 compliant and the delay in closing a professional services
contract with a significant customer. Cost of professional services as a
percentage of total professional services revenue increased as the rate of
decrease in professional services revenue was greater than the rate of decrease
in costs associated with our professional services organization.
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 was 30% in both the current fiscal quarter ended
April 30, 2000 and in the same quarter a year ago. Sales and marketing expenses
increased $2.1 million or 49% to $6.3 million in the current fiscal quarter from
$4.2 million in the same quarter a year ago. The dollar increase is due
primarily to our expansion of our direct sales and marketing organization, and
to a lesser extent, our marketing initiatives surrounding our FULL.CYCLE
distributed systems capabilities and the development of our international sales
and telesales efforts. As a percentage of total revenue, sales and marketing
expenses remained unchanged when comparing the current fiscal quarter to the
same quarter a year ago as the rate of increase in total revenue was the same as
the rate of increase in sales and marketing expenses. In absolute dollar terms,
we expect sales and marketing expenses to increase as we continue to hire
additional sales and marketing personnel, market our distributed systems
products 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 was 10% in both the current fiscal
quarter and the same quarter a year ago. Research and development expenses
increased $0.6 million or 47% to $2.0 million in the current fiscal quarter from
$1.4 million in the same quarter a year ago. The dollar increase is primarily
due to salary, bonus, payroll tax, employee benefits and other headcount related
costs which resulted from the Company's acquisition of Diamond in June 1999, and
to a lesser extent, increases in expanding our research and development efforts
to enhance existing products and develop our FULL.CYCLE distributed systems and
SERNET products. 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.
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
12% in the current fiscal quarter as compared to 8% in the same quarter a year
ago. General and administrative expenses increased $1.5 million or 133% to $2.6
million in the current fiscal quarter from $1.1 million in the same quarter a
year ago. The dollar increase is primarily due to increases in salary, bonus,
payroll tax and employee benefit costs associated with the expansion of our
administrative infrastructure in order to support our increased sales,
marketing, professional services
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and maintenance activities, and to a lesser extent, increases in legal fees and
costs associated with being a public company. We expect general and
administrative expenses to increase in absolute dollar terms as we expand our
infrastructure and our operations.
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 consistent with FASB Interpretation No. 28. Of the total deferred
stock-based compensation, $0.1 million was amortized in the current fiscal
quarter as compared to $0.3 million in the same quarter 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 April 30, 2000,
SERENA had $0.3 million in unamortized stock-based compensation.
AMORTIZATION OF INTANGIBLE ASSETS. In connection with the acquisitions of
Optima Software, Inc. in September, 1998 and Diamond in June, 1999, the Company
has recorded $25.7 million in intangible assets, of which $22.1 million is
unamortized as of April 30, 2000. Combined, intangible assets are being
amortized over periods of one year or less on $0.7 million, two to seven years
on $3.8 million and fifteen years on the remaining $21.2 million. Of the total
intangible assets, $0.5 million was amortized in both the current fiscal quarter
ended April 30, 2000 and the same quarter a year ago. We expect to amortize an
additional $1.6 million in the remaining three quarters of fiscal 2001 and $2.1
million in fiscal 2002. The intangible assets will be fully amortized by the end
of fiscal 2014.
INTEREST AND OTHER INCOME, NET
INTEREST AND OTHER INCOME, NET. Interest and other income, net increased
$0.9 million or 113% to $1.7 million in the current fiscal quarter from
$0.8 million in the same quarter a year ago. The dollar increase in interest and
other income, net is generally due to increases in balances on interest bearing
accounts, such as cash and cash equivalents, and both short and long-term
investments, resulting from accumulation of earnings. The increase in the
current fiscal quarter ended April 30, 2000 when compared to the same quarter a
year ago was also the direct result of the Company's initial public offering in
February 1999 which generated net proceeds to the Company totaling
$48.4 million and $10.9 million in February 1999 and March 1999, respectively.
INCOME TAXES
INCOME TAXES. Income taxes were $3.5 million in the current fiscal quarter
ended April 30, 2000 and $1.7 million in the same quarter from a year ago,
representing effective income tax rates of 43% and 44%, respectively. The
Company's effective income tax rate decreased slightly in the current fiscal
quarter, when compared to the same quarter a year ago, predominantly due to a
decrease of $0.2 million in nondeductible charges recorded in the current fiscal
quarter, when compared to the same quarter a year ago. The Company recorded
$0.6 million in nondeductible charges in the current fiscal quarter consisting
of $0.1 million in stock-based compensation and $0.5 million in amortization of
intangible assets arising from both the Optima and Diamond acquisitions as
compared to $0.8 million in nondeductible charges recorded in the same quarter
from a year ago consisting of $0.3 million in stock-based compensation and
$0.5 million in amortization of intangible assets arising from the Optima
acquisition. 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.
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LIQUIDITY AND CAPITAL RESOURCES
Since SERENA's inception, we have financed our operations and met our
capital requirements through cash flows from operations. As of April 30, 2000,
SERENA had $85.3 million in cash and cash equivalents, and an additional $25.8
million in short-term investments consisting principally of high grade
commercial paper, certificates of deposit and short-term bonds. Cash flows
provided by operating activities were $6.8 million and $4.7 million in the
current fiscal quarter ended April 30, 2000 and the same quarter a year ago,
respectively. SERENA's cash flows provided by operating activities exceeded net
income during each of these quarters principally due to cash collections in
advance of revenue recognition for maintenance contracts, the inclusion of
non-cash expenses in net income, decreases in accounts receivable, and growth in
corporate income taxes payable; all partially offset by decreases in accrued
expenses and payables, growth in prepaid expenses and other assets, and in last
fiscal year's first quarter only, a decrease in corporate income taxes payable.
Cash used in investing activities were predominantly related to the purchase of
short and long-term investments totaling $2.6 million and $23.4 million in the
current fiscal quarter and the same quarter from a year ago, respectively, and
to a lesser extent, purchases of computer equipment and office furniture and
equipment in both quarters; all partially offset by payments of accrued interest
and principal received on notes receivable in the current fiscal quarter and
payments received on stockholder notes in the same quarter from a year ago. In
the current fiscal quarter ended April 30, 2000, cash flows from financing
activities came entirely from the exercise of stock options under the Company's
employee stock option plan totaling $0.3 million. In the same quarter from a
year ago, cash flows from financing activities came entirely from the Company's
initial public offering of common stock resulting in net proceeds to SERENA of
$57.9 million.
At April 30, 2000, SERENA did not have any material commitments for capital
expenditures and has no revolving credit agreement or other term loan agreements
with any bank or other financial institution.
At April 30, 2000, SERENA had working capital of $98.4 million and accounts
receivable, net of allowances, of $14.5 million. Total deferred revenue
increased to $20.5 million at April 30, 2000 from $19.0 million at January 31,
2000 primarily as a result of increased billings of maintenance fees.
We believe that current cash and short-term investments, 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT, 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 BUT NOT LIMITED TO, OUR RELIANCE ON
OUR MAINFRAME PRODUCTS FOR REVENUE, CHANGES IN REVENUE MIX AND SEASONALITY, OUR
ABILITY TO DELIVER OUR PRODUCTS ON THE DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE
ON REVENUES FROM OUR INSTALLED BASE, EXPANSION OF OUR PROFESSIONAL SERVICES AND
INTERNATIONAL ORGANIZATIONS, OUR ABILITY TO MANAGE OUR GROWTH AND 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
report, including many that are beyond our control. As a result, we
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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.
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 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 distributed systems products
- 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,
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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.
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON SALES OF OUR FULL.CYCLE
MAINFRAME PRODUCTS FOR OUR REVENUE
Historically, the 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 and COMPAREX, two of our FULL.CYCLE mainframe products,
have been responsible for a substantial majority of our revenue. In the current
fiscal quarter ended April 30, 2000 and the same quarter from a year ago, sales
of CHANGE MAN and COMPAREX together accounted for approximately 82% and 68% of
our software license revenue, respectively. 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.
OUR INTRODUCTION OF SERENA SCM PRODUCTS FOR DISTRIBUTED SYSTEMS MAY NOT BE
SUCCESSFUL
We introduced our ECHANGE MAN product in fiscal 2000 and are currently
developing our product suite to support distributed systems platforms. If we do
not successfully develop, market, sell and support our distributed systems
products, this would materially adversely affect our business and our future
quarterly and annual operating results. Historically, the majority of our
products have been designed for the mainframe platform, and the majority 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 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
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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 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.
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. The majority 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, the majority 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.
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 distributed systems product suite. Any
delay in releasing our new distributed systems products, for whatever reason,
would impair our revenue growth.
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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 hire, 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. Our business has grown
substantially in recent years, with total revenue increasing from $32.1 million
in fiscal 1998 to $48.3 million in fiscal 1999 and $75.4 million in fiscal 2000.
In connection with this revenue growth, beginning in fiscal 1998 and continuing
in fiscal 1999, and 2000, we began a strategic expansion of our sales, marketing
and professional service activities. This expansion included our June 1999
acquisition of Diamond which expanded our research and development organization.
This growth has resulted, and any future growth will result, in new and
increased responsibilities for management personnel.
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 INTEND TO EXPAND OUR INTERNATIONAL OPERATIONS AND MAY ENCOUNTER A NUMBER OF
PROBLEMS 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 subsidiaries in the United Kingdom
and in 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. We intend to open additional international offices. 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. International sales represented
approximately 13% and 19% of our total revenue in the current fiscal quarter
ended April 30, 2000 and the same quarter a year ago, respectively. 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
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- 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 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
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.
MAINFRAME 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, MERANT, 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
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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 DISTRIBUTED SYSTEMS SCM MARKET. We also face significant
competition as we develop, market and sell our distributed systems products,
including eChange Man. If we are unable to successfully penetrate the
distributed systems SCM market, our business and future quarterly and annual
operating results will be materially adversely affected. Penetrating the
existing distributed systems SCM market will be difficult. Competitors in the
distributed systems market include Rational Software, Computer Associates,
Continuus, MERANT, Microsoft, Novell, and other smaller private companies.
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 could
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. Licenses of STARTOOL accounted
for 8% and 25% of our total software licenses revenue in the current fiscal
quarter ended April 30, 2000 and the same quarter from a year ago, respectively.
Licenses of STARWARP accounted for 1% of our total software licenses revenue in
both quarters.
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. Sales of DETECT+RESOLVE MAINFRAME accounted for 3% and 4% of
our total software licenses revenue in the current fiscal quarter ended
April 30, 2000 and the same quarter from a year ago, respectively.
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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 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. As of the date of this
statement, the parties have completed fact discovery. To date, Compuware has not
sought preliminary injunctive relief. However, 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. 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 in 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,
and/or pay attorneys' fees. Such royalty or licensing agreements, if required,
may not be available on terms acceptable to SERENA. In the event of a successful
claim against us, our business, operating results or financial condition could
be materially adversely affected.
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 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.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED
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
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support personnel, and successfully develop, market and support our distributed
systems product suite which, excluding our ECHANGE MAN product, 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 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, particularly the Ukraine. 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.
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. 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 are planning 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
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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.
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. 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.
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 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 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. 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
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not use derivative financial instruments in its investment
portfolio and has no foreign exchange contracts. Its financial instruments
consist of cash and cash equivalents, short and long-term investments, trade
accounts and contracts receivable, accounts payable, and long-term obligations.
The Company considers investments in highly liquid instruments purchased with a
remaining maturity of 90 days or less to be cash equivalents. All of the
Company's cash equivalents and short and long-term investments, principally
consist of commercial paper and debt securities, and are classified as
available-for-sale as of April 30, 2000. The Company's exposure to market risk
for changes in interest rates relates primarily to its short and long-term
investments and short-term obligations, thus, fluctuations in interest rates
would not have a material impact on the fair value of these securities.
Sales to foreign countries accounted for approximately 13% of the total
revenue during the quarter ended April 30, 2000. Because the Company invoices
certain of its foreign sales in currencies other than the United States dollar,
predominantly the British pound sterling and German deutsche mark, and does not
hedge these transactions, fluctuations in exchange rates could adversely affect
the translated results of operations of the Company's foreign subsidiaries.
Therefore, foreign exchange fluctuation could create a risk of significant
balance sheet gains or losses on the Company's consolidated financial
statements. However, given the Company's foreign subsidiaries' net book values
as of April 30, 2000 and net cash flows for the most recent fiscal quarter then
ended, the Company believes that such foreign denominated balances and activity
are not material.
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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 9 million shares of its
Common Stock, including 3 million shares on behalf of selling stockholders, at a
per share price of $8.67 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 Chase H&Q 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 1,350,000 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 262,500 shares of the
Company's common stock valued at $8.51 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
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT TITLE
--------------------- ------------------------------------------------------------
<C> <S> <C>
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
April 30, 2000.
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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
</TABLE>
Date: June 14, 2000
26
