<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission file number 0-17136
BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2126120
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
BMC Software, Inc.
2101 CityWest Boulevard
Houston, Texas 77042
(Address of principal executive officer) (Zip Code)
Registrant's telephone number including area code: (713)918-8800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- ----
As of November 11, 1997, there were outstanding 101,686,240 shares of Common
Stock, par value $.01, of the registrant.
<PAGE> 2
BMC SOFTWARE, INC. AND SUBSIDIARIES
Quarter Ended September 30, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
September 30, 1997 (Unaudited) and March 31, 1997 3
Condensed Consolidated Statements of Earnings
Three months and six months ended September 30, 1997
and 1996 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Six months ended September 30, 1997 and 1996
(Unaudited) 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, March 31,
ASSETS 1997 1997
------------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 65,929 $ 79,794
Investment securities 39,434 59,159
Receivables:
Trade, net 96,137 87,576
Interest and other 11,597 11,247
-------- --------
Total receivables 107,734 98,823
Prepaid expenses and other 9,288 10,606
-------- --------
Total current assets 222,385 248,382
-------- --------
Property and equipment, net 143,112 116,296
Software development costs, net 48,697 39,486
Purchased software, net 36,307 19,735
Finance receivables 4,521 4,397
Investment securities 433,609 402,742
Deferred charges and other assets 10,178 13,121
-------- --------
$898,809 $844,159
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(continued)
<TABLE>
<CAPTION>
September 30, March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 10,241 $ 9,439
Accrued liabilities and other 63,209 50,025
Current portion of deferred revenue 159,173 145,199
--------- ---------
Total current liabilities 232,623 204,663
--------- ---------
Deferred revenue and other 92,102 93,284
--------- ---------
Total liabilities 324,725 297,947
--------- ---------
Stockholders' equity:
Common stock 1,050 1,050
Additional paid-in capital 91,845 82,391
Retained earnings 599,481 565,122
Foreign currency translation adjustment (778) (820)
Unrealized gain (loss) on securities available for sale 2,561 (750)
--------- ---------
694,159 646,993
Less treasury stock 116,271 96,901
Less unearned portion of restricted stock compensation 3,804 3,880
--------- ---------
Total stockholders' equity 574,084 546,212
--------- ---------
$ 898,809 $ 844,159
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses $110,201 $ 82,025 $217,947 $164,655
Maintenance 52,508 44,475 103,176 87,895
-------- -------- -------- --------
Total revenues 162,709 126,500 321,123 252,550
-------- -------- -------- --------
Operating expenses:
Selling and marketing 46,737 35,735 94,138 73,261
Research and development 23,281 19,833 44,050 37,692
Cost of maintenance services
and product licenses 18,204 13,122 35,719 27,136
General and administrative 12,635 11,083 23,824 21,678
Acquired research and
development costs 5,201 -- 65,473 11,259
-------- -------- -------- --------
Total operating expenses 106,058 79,773 263,204 171,026
-------- -------- -------- --------
Operating income 56,651 46,727 57,919 81,524
Other income 7,148 4,639 13,296 8,933
-------- -------- -------- --------
Earnings before taxes 63,799 51,366 71,215 90,457
Income taxes 18,877 16,180 36,856 28,099
-------- -------- -------- --------
Net earnings $ 44,922 $ 35,186 $ 34,359 $ 62,358
======== ======== ======== ========
Earnings per share $ .41 $ .33 $ .32 $ .59
======== ======== ======== ========
Shares used in computing
earnings per share 108,332 106,776 108,192 106,456
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-------------------------
1997 1996
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 34,359 $ 62,358
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Acquired research and development costs 65,473 11,259
Depreciation and amortization 24,572 15,796
Net change in receivables,
payables and other items 6,626 47,197
--------- ---------
Total adjustments 96,671 74,252
--------- ---------
Net cash provided by operating activities 131,030 136,610
--------- ---------
Cash flows from investing activities:
Technology acquisitions, net of cash acquired (66,989) (13,580)
Purchased software and related assets (1,718) (4,642)
Capital expenditures (36,476) (13,049)
Capitalization of software development (18,658) (10,288)
Purchases of investment securities (53,454) (125,774)
Proceeds from investment securities 45,623 36,393
Increase in long-term finance receivables (124) (29,491)
--------- ---------
Net cash used in investing activities (131,796) (160,431)
--------- ---------
Cash flows from financing activities:
Income tax reduction relating to stock options 13,170 --
Stock options exercised and other 11,617 7,977
Treasury stock acquired (37,928) (880)
--------- ---------
Net cash used in financing activities (13,141) 7,097
Effect of exchange rate changes on cash 42 (39)
--------- ---------
Net change in cash and cash equivalents (13,865) (16,763)
Cash and cash equivalents at beginning of period 79,794 62,128
--------- ---------
Cash and cash equivalents at end of period $ 65,929 $ 45,365
========= =========
Supplemental disclosure of cash flow information:
Cash paid for Income taxes $ 22,997 $ 52,074
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
BMC SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements include
the accounts of BMC Software, Inc. and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals)
which, in the opinion of management, are necessary for a fair presentation of
the results for the interim periods presented. These financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
These financial statements should be read in conjunction with the
Company's annual audited financial statements for the year ended March 31,
1997, as filed with the Securities and Exchange Commission on Form 10-K.
Note 2 - Earnings Per Share
Earnings per share is based on the weighted average number of common
shares and common stock equivalents outstanding for the period. For purposes
of this calculation, outstanding stock options and unearned restricted stock
shares are considered common stock equivalents using the treasury stock method.
Fully diluted earnings per share is the same as, or not materially different
from, primary earnings per share and, accordingly, is not presented.
Note 3 - Technology Acquisitions
During the quarter ended September 30, 1997, the Company completed an
acquisition of a technology company for an aggregate purchase price of
approximately $6,995,000, including direct acquisition costs. During the
quarter ended June 30, 1997, the Company completed two acquisitions which
included DataTools, Inc. and another technology company for an aggregate
purchase price of approximately $80,700,000, including direct acquisition
costs. The Company funded these acquisitions primarily with cash and to a
lesser extent through the issuance of stock options in its common stock. The
Company accounted for these transactions using the purchase method and for the
three months ended September 30, 1997, and for the three months ended June 30,
1997, respectively, recorded a $3,381,000 and $57,267,000 charge, net of a
$1,820,000 and $3,005,000 income tax benefit, for acquired research and
development costs. As of September 30, 1997, approximately $10,742,000 of
additional consideration and transaction costs relating to these acquisitions
remained unpaid.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This discussion comprises historical information for the periods
covered, followed by certain forward looking information and information about
certain risks and uncertainties that could affect the Company's future
operating results. This discussion should be read in conjunction with the
attached
7
<PAGE> 8
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
consolidated financial statements and notes thereto and with the audited
financial statements and notes thereto, and the Management's Discussion and
Analysis of Results of Operation and Financial Condition, contained in the
Company's Annual Report on Form 10-K for fiscal 1997.
A. HISTORICAL INFORMATION
RESULTS OF OPERATION
The following table sets forth, for the periods indicated, the
percentages that selected items in the Condensed Consolidated Statements of
Earnings bear to total revenues. These comparisons of financial results are
not necessarily indicative of future results.
<TABLE>
<CAPTION>
Percentage of Total Revenues
------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -----------------
1997 1996 1997 1996
------------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
License 67.7% 64.8% 67.9% 65.2%
Maintenance 32.3 35.2 32.1 34.8
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Selling and marketing 28.7 28.2 29.3 29.0
Research and development 14.3 15.7 13.7 14.9
Cost of maintenance services
and product licenses 11.2 10.4 11.1 10.7
General and administrative 7.8 8.8 7.4 8.6
Acquired research and development costs 3.2 -- 20.4 4.5
----- ----- ----- -----
Operating income 34.8 36.9 18.1 32.3
Other income 4.4 3.7 4.1 3.5
----- ----- ----- -----
Earnings before taxes 39.2 40.6 22.2 35.8
Income taxes 11.6 12.8 11.5 11.1%
----- ----- ----- -----
Net earnings 27.6% 27.8% 10.7% 24.7%
===== ===== ===== =====
</TABLE>
8
<PAGE> 9
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
REVENUES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- ---------------------
(in thousands) (in thousands)
1997 1996 Change 1997 1996 Change
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
North American license revenues $ 73,200 $ 55,488 32% $148,399 $111,216 33%
International license revenues 37,001 26,537 39% 69,548 53,439 30%
-------- -------- -------- --------
Total license revenues 110,201 82,025 34% 217,947 164,655 32%
Maintenance revenues 52,508 44,475 18% 103,176 87,895 17%
-------- -------- -------- --------
Total revenues $162,709 $126,500 29% $321,123 $252,550 27%
======== ======== ======== ========
</TABLE>
LICENSE REVENUES
The Company's license revenues consist of product license fees,
capacity-based license upgrade fees and restructuring fees. Product license fees
are generated by (a) the initial licenses of a product on either a per copy or
MIPS capacity licensing basis and (b) the licensing of additional copies of a
product previously licensed under the Company's per copy, tier-based
licensing programs. Capacity-based license upgrade fees are charged
when a customer acquires the right to run an already licensed product on
additional processing capacity, which may be measured traditionally by central
processing unit ("CPU") tier or by the aggregate processing capacity measured in
millions of instructions per second ("MIPS") on which the Company's products are
installed. These license upgrade fees include fees associated with currently
installed additional processing capacity and fees associated with anticipated
future additional processing capacity. Restructuring fees are charges used to
increase the discounts used to calculate future maintenance and upgrade charges
for a customer's installed products.
The Company's North American operations generated 66% and 68% of total
license revenues in the quarters ended September 30, 1997 and 1996,
respectively, and 68% of total license revenues in the six-month periods ending
on such dates. Year-over-year growth in North American license revenues in the
second quarter of fiscal 1998 over the second quarter of fiscal 1997 was
principally from increased capacity-based upgrade fees for current capacity,
and to a lesser extent, restructuring fees and future capacity upgrade fees.
For the six months ended September 30, 1997, the 33% increase in North American
license revenues over the prior year is primarily attributable to increased
capacity-based upgrade fees for both current and future capacity.
Capacity-based upgrade fees for current capacity represented the single largest
component of North American license revenues for the quarter and six months
ended September 30, 1997. International license revenues represented 34% and
32% of total license revenues in the quarters ended September 30, 1997 and
1996, respectively, and 32% of total license revenues in the six-month periods
ending on such dates. International license revenue growth from both the three
and six month periods ended September 30, 1996 to the three and six month
periods ended September 30, 1997 was derived principally from new license sales
of the Company's client-server products, and to a lesser extent, capacity-based
upgrade fees for current capacity.
9
<PAGE> 10
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
Capacity-based upgrade fees include fees for both current and
anticipated future additional processing capacity. These fees accounted
for 34% and 30% of total revenues in the quarters ended September 30, 1997 and
1996, respectively, and 34% and 26% of total revenues for the respective
six-month periods. The growth and sustainability of the Company's
mainframe-based license revenues are dependent upon these capacity-based
upgrade fees, particularly within its largest customer accounts. Most of the
Company's largest customers have entered into enterprise license agreements
allowing them to install the Company's products on an unspecified number of
CPUs, subject to a maximum limit on the aggregate power of the CPUs as measured
in MIPS. Substantially all of these transactions include upgrade charges
associated with anticipated future additional processing capacity beyond the
customer's current usage level and/or a restructuring fee, and some include
license fees for additional products. In the quarters ended September 30,
1997 and 1996, the enterprise license fees for future additional processing
capacity and license restructurings comprised approximately 24% and 26% of
total revenues, respectively, and comprised 25% and 24% of total revenues in
the respective six-month periods. The fees associated with future additional
mainframe processing capacity typically represent from one-half to
substantially all of the license fees included in the enterprise license
transaction. Over the past three fiscal years, the Company has experienced a
marked increase in demand from its largest customers for current and
anticipated mainframe processing capacity, and the Company expects that it will
continue to be dependent upon these license revenue components. With the rapid
advancement of client/server technology and customers' needs for more
functional and open applications to replace legacy systems, however, there can
be no assurance that the demand for mainframe processing capacity will continue
at current levels. Should this trend slow dramatically or reverse, it would
adversely impact the Company's mainframe-based license revenues and operating
results. See "Forward Looking Information and Certain Risks and Uncertainties
that Could Affect Future Operating Results."
MAINTENANCE REVENUES
Maintenance and support revenues represent the ratable recognition of
customers' prepaid fees entitling them to product enhancements, technical
support services and ongoing compatibility with third-party operating systems,
database management systems and applications. Maintenance and support charges
are generally 15% to 20% of the list price of the product at the time of
renewal, less any applicable discounts. Maintenance revenues also include the
ratable recognition of the bundled fees for first-year maintenance services
covered by the related perpetual license agreement. The Company continues to
invest heavily in product maintenance and support and believes that maintaining
its reputation for superior product support is a key component of its value
pricing model.
Maintenance revenues have increased over the last three fiscal years
as a result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase in proportion
to the processing capacity on which the products are installed; consequently,
the Company receives higher absolute maintenance fees as customers install its
products on additional processing capacity. Due to increased discounting at
higher levels of "future MIPS" licensing, however, the maintenance fees per
MIPS are often reduced in enterprise license agreements. Historically, the
Company has enjoyed high maintenance renewal rates for its mainframe-based
products. Should customers migrate from their mainframe applications or find
alternatives to the
10
<PAGE> 11
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
Company's products, however, increased cancellations could occur. This would
adversely impact the sustainability and growth of the Company's maintenance
revenues. To date, the Company has been successful in extending its
traditional maintenance and support pricing model to the client/server market.
At this time, there is insufficient historical data to determine whether
customers will continue to accept this pricing model and renew their
maintenance and support contracts at the levels experienced in the mainframe
market.
PRODUCT LINE REVENUES
The Company's products for the IBM-compatible mainframe environment
accounted for 77% and 82% of total revenues in the quarters ended September 30,
1997 and 1996, and 80% and 85% of total revenues, respectively, in the six-month
periods. The database utilities and administrative tools for IBM's IMS DB and
DB2 database management systems comprise the largest portion of the Company's
mainframe-based and total revenues. These product lines accounted for 61% of
total revenues and 58% of license revenues in the quarter ended September 30,
1997, and 63% and 62% of total and license revenues in the respective six-month
periods. Total revenues and license revenues from these product lines grew 17%
and 18%, respectively, in the second quarter of fiscal 1998, and grew 21% and
26% in the six-month period of fiscal 1998 compared to the comparable prior year
periods. The Company's other products for the mainframe environment
contributed 16% of total revenues and 14% of license revenues in the second
quarter of fiscal 1998, and contributed 17% and 14% of total and license
revenues, respectively, in the six-month period of fiscal 1998. Total revenues
for the Company's other mainframe products in the fiscal 1998 second quarter
grew by 49% and license revenues grew by 106% year- over-year.
The Company's client/server product lines primarily comprise the
PATROL application and database management solutions, the PATROL DB database
administration products and the Company's high-performance database backup and
recovery solutions. These product lines contributed 23% of total revenues and
28% of license revenues in the quarter ended September 30, 1997, and 20% and
24% of total and license revenues, respectively, in the six-month period.
Total revenues for these product lines grew 62% and license revenues grew 53%
in the second quarter of fiscal 1998, compared to the comparable, prior year
quarter.
11
<PAGE> 12
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
OPERATING
EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- ---------------------
(in thousands) (in thousands)
1997 1996 Change 1997 1996 Change
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing $ 46,737 $ 35,735 31% $ 94,138 $ 73,261 28%
Research and development 23,281 19,833 17% 44,050 37,692 17%
Cost of maintenance services
and product licenses 18,204 13,122 39% 35,719 27,136 32%
General and administrative 12,635 11,083 14% 23,824 21,678 10%
Acquired research and
development 5,201 -- N/A 65,473 11,259 482%
-------- -------- -------- --------
Total operating expenses $106,058 $ 79,773 $263,204 $171,026
======== ======== ======== ========
</TABLE>
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased year-over-year by 31% or
$11,002,000 for the quarter ended September 30, 1997, and by 28% or $20,877,000
for the six month period ended September 30, 1997. The single largest
contributor to this expense growth for both the three month and six month
periods ending September 30, 1997 was personnel costs. Personnel costs
increased as the result of a 59% increase in headcount from September 30, 1996
to September 30, 1997, which was primarily attributable to significant
increases in the Company's open systems sales representatives, including the
37 sales representatives acquired with DataTools, Inc. in the June 1997
quarter. Other contributors to the increase were expenses associated with
trade shows, travel and charges for overdue receivables. As a percentage of
total revenues, selling and marketing expenses remained relatively constant at
28% to 29% for the three and six month periods ended September 30, 1997 and
1996, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased primarily due to the hiring of
additional personnel who were hired to develop new product offerings and, to a
lesser extent, support existing products. Research and development headcount
from September 30, 1996 to September 30, 1997 increased by 32%. These
increases have been partially offset by increases in software capitalization in
both the quarter and six months ended September 30, 1997. For the second
quarter of fiscal 1998, the Company capitalized $9,380,000 in software
development costs as compared to $4,378,000 in the year-ago quarter. The
Company capitalized $18,658,000 and $10,288,000 in software development costs
during the six months ended September 30, 1997 and 1996, respectively. The
Company capitalizes its software development costs when the projects under
development reach technological feasibility as defined by Statement of
Financial Accounting Standards No. 86. The capitalization amounts will
fluctuate from period to period in part based upon the status and number of
software projects which are in process.
12
<PAGE> 13
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
Research and development expenses (which are reported net of the above-mentioned
capitalized software development costs) as a percentage of total revenues have
decreased slightly from 16% in the second quarter of fiscal 1997 to 14% in the
second quarter of fiscal 1998, and decreased slightly from 15% in the six month
period in fiscal 1997, to 14% in the six month period in fiscal 1998.
Over the last three fiscal years, the Company has supplemented its
internal product development efforts with acquisitions of several companies and
technologies, including the base technologies for the PATROL product lines.
The Company's acquisition strategy in general has been to acquire emerging
technologies, rather than established companies. See "-Acquired Research
and Development Costs" below.
COST OF MAINTENANCE SERVICES AND PRODUCT LICENSES
Cost of maintenance services and product licenses expenses consists of
amortization of purchased and internally developed software, costs associated
with the maintenance, enhancement and support of the Company's products and
royalty fees. This expense line item has increased in the second quarter of
fiscal 1998 primarily as a result of increases in maintenance, enhancement and
support activities and amortization of internally developed software.
Amortization for the Company's capitalized software totaled $4,401,000 and
$1,112,000, including accelerated charges discussed below, in the second
quarter of fiscal 1998 and 1997, respectively. The Company's amortization
of internally developed software costs totaled $8,894,000 and $4,304,000 during
the six months ended September 30, 1997, and 1996, respectively. The
Company accelerated the amortization of some of its older products by
approximately $2,734,000 during the second quarter of fiscal 1998, versus $0 in
the second quarter of fiscal 1997, and by approximately $5,639,000 and
$2,009,000 in the respective six-month periods. These software products were
not expected to generate future revenues sufficient to justify the carrying
value of the assets. As a percentage of total revenues, cost of maintenance
services and product licenses increased slightly from 10% in the second quarter
of fiscal 1997 to 11% in the second quarter of fiscal 1998 while these expenses
remained constant at 11% in the six-month periods of fiscal 1998 and 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company's general and administrative expenses increased by
$1,552,000 or 14% in the second quarter of fiscal 1998 as compared to the
second quarter of fiscal 1997 and increased by $2,146,000 or 10% compared to
the prior years six-month period. The increase is primarily related to
personnel costs associated with a 10% increase in associated headcount from
September 30, 1996 to September 30, 1997. Increasing infrastructure costs
have also contributed to the expense growth. As a percentage of total
revenues, general and administrative expenses decreased slightly from 9% in the
second quarter of fiscal 1997 to 8% in the second quarter of fiscal 1998 and
decreased from 9% in the six-month period in fiscal 1997 to 7% in the six-month
period in fiscal 1998.
13
<PAGE> 14
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
ACQUIRED RESEARCH AND DEVELOPMENT COSTS
The Company completed the acquisitions of stock and assets (including
in-process research and development) of certain technology companies for an
aggregate purchase price of $80,700,000 during the first quarter of fiscal
1998, and for an aggregate purchase price of $6,995,000 during the second
quarter of fiscal 1998, including direct acquisition costs. The Company
accounted for these transactions using the purchase method of accounting.
During the respective quarters, the Company recorded a $60,272,000 charge
($57,267,000 net of income tax benefits) and a $5,201,000 charge ($3,381,000
net of income tax benefits) for acquired research and development costs.
OTHER INCOME
For the second quarter of fiscal 1998, other income was $7,148,000,
reflecting an increase of 54% over $4,639,000 of other income in the same
quarter of fiscal 1997. Other income increased by 49% to $13,296,000 in the
six-month period in fiscal 1998, from $8,933,000 in the six-month period in
fiscal 1997. Other income consists primarily of interest earned on tax-exempt
municipal securities, euro bonds, corporate bonds, mortgage securities and
money market funds.
INCOME TAXES
For the second quarter of fiscal 1998, income tax expense was
$18,877,000, compared to $16,180,000 for the same quarter in fiscal 1997.
Income tax expense was $36,856,000 and $28,099,000 for the six-month
periods in fiscal 1998 and 1997, respectively. The Company's income tax
expense represents the federal statutory rate of 35%, plus certain state
taxes, reduced by the benefit from the Company's Foreign Sales Corporation, the
effect of tax exempt interest earned from cash investments, the effect of tax
deductions on certain technology acquisitions and foreign income taxes.
Excluding the impact of technology acquisitions, the Company's effective income
tax rate for the six months ended September 30, 1997 has decreased to 30% from
31% during the same period in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth through funds generated from
operations. As of September 30, 1997, the Company had cash, cash equivalents
and investment securities of $538,972,000.
The Company effectively repurchased 641,510 of its shares during
the second quarter of fiscal 1998. As of September 30, 1997, the Company has
authorization from its Board of Directors, to acquire up to 4,297,300 shares of
its common stock pursuant to the Company's stock repurchase program.
The Company believes that existing cash balances and funds generated from
operations will be sufficient to meet its liquidity requirements for the
foreseeable future.
14
<PAGE> 15
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
B. FORWARD LOOKING INFORMATION AND CERTAIN RISKS AND UNCERTAINTIES THAT
COULD AFFECT FUTURE OPERATING RESULTS.
The Company's future operating results may vary substantially from
period to period. The results of the Company's operating results for the
quarter ended September 30, 1997 are not necessarily indicative of results for
following periods, including the fiscal year ended March 31, 1998. Expectations
of, and forecasts and projections by the Company and others are by their nature
forward looking statements. Numerous important factors, risks and uncertainties
affect the Company's operating results and could cause the Company's actual
results to differ materially from the results implied by such forward looking
statements made by, or on behalf of, the Company. These important factors,
risks and uncertainties include, but are not limited to, those described in the
following paragraphs and the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997.
The Company's stock price has been and is highly volatile. Future
revenues, earnings and stock prices may be subject to wide swings, particularly
on a quarterly basis, in response to variations in operating and financial
results, anticipated revenue and/or earnings growth rates, competitive
pressures and other factors. The stock price of software companies in
general, and the Company in particular, is based on expectations of
sustained future revenue and earnings growth. Any failure to meet anticipated
revenue and earnings levels in a period or any negative change in the Company's
perceived long-term growth prospects would likely have a significant adverse
effect on the Company's stock price. The growth rates of the Company's license
revenues, total revenues, net earnings and earnings per share have accelerated
over the last 24 months. The Company may not achieve, in future periods, these
relatively higher rates of growth.
The timing and amount of the Company's license revenues are subject to
a number of factors that make estimation of operating results prior to the end
of a quarter extremely uncertain. The Company generally operates with
little or no sales backlog and, as a result, license revenues in any quarter
are dependent upon contracts entered into or orders booked and shipped in that
quarter. Most of the Company's sales are closed at the end of each quarter,
and there has been and continues to be a trend toward larger enterprise license
transactions, which can have sales cycles of up to a year or more and require
approval by a customer's upper management. These transactions are typically
difficult to manage and predict. Failure to close an expected individually
significant transaction could cause the Company's revenues and earnings in
a period to fall short of expectations. Other factors that may cause
significant fluctuations in the Company's quarterly revenues include
competition, industry or technological trends, customer budgetary decisions,
mainframe processing capacity growth, general economic conditions or
uncertainties, mainframe industry pricing and other trends, announcements of
new hardware or software products and the timing of price increases. The
Company generally does not know whether revenues and earnings will meet
expected results until the final days or day of a quarter.
The Company's operating expenses are to a large extent fixed in the
short term so that the Company has very limited ability to adjust its planned
expenses if revenues fail to meet expectations; therefore, if near-term demand
for the Company's products weakens in a given quarter, there could be
15
<PAGE> 16
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
an immediate, material adverse effect on net revenues and operating results,
which would likely result in a precipitous drop in its stock price.
In the quarter ended September 30, 1997, the Company announced several
executive management and organizational changes, including the elimination of
the position of chief operating officer and the consolidation of worldwide
sales and marketing into a single, integrated unit. In addition, the Company
replaced its senior vice president in charge of research and development. The
Company may make other management and organizational changes in the future.
Organizational and management changes are intended to enhance competitiveness,
productivity and execution; however, there can be no assurance that they will
produce the desired results.
The Company's operating margins (exclusive of charges for acquired
research and development costs) have ranged from 37% to 45% in recent quarters,
which is at the high-end of the range for peer companies. The Company does not
expect future margin expansion. Further, since research and development,
sales, support and distribution costs for client/server software products are
generally higher than for mainframe products, operating margins will experience
more pressure as the mix of the Company's business continues its shift to
client/server revenues. The Company is continuing to develop indirect channel
relationships to increase its coverage and presence in a cost effective manner.
There can be no assurance, however, that this strategy will be successful. If
the Company's direct sales force remains the primary channel for its
client/server products, its selling and marketing expenses could increase and
operating margins could be reduced.
The Company has historically realized greater revenues and net
earnings in the latter half of its fiscal year; the quarter ending December 31
coincides with the end of customers' annual budgetary periods and the quarter
ending March 31 coincides with the end of the Company's annual sales plans and
fiscal year. For the same reasons, the Company has typically reported lower or
flat revenues in the first two quarters of a fiscal year than in the last two
quarters of the previous year, resulting in lower operating margins in the
first two quarters. The Company historically has generated greater revenues in
the third and fourth quarters while maintaining lower rates of expense growth
and expanded operating margins. Past financial performance is not a reliable
indicator of future performance, and there can be no assurance that this
pattern will be maintained.
Future operating results are also dependent on sustained performance
improvement by the Company's international offices. In this regard, the economy
in Europe has been somewhat depressed in the past year, with relatively high
unemployment. The Company's operations and financial results could be
significantly adversely affected by issues such as changes in foreign currency
exchange rates, sluggish regional economic conditions and difficulties in
staffing and managing international operations. Many systems and applications
software vendors are experiencing difficulties internationally, particularly in
Europe. The European office whose results have been and are expected to be the
most significant to the Company's overall results is the German office, which
accounted for over 33% of total international revenues in each of the prior
three fiscal years.
16
<PAGE> 17
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
The Company derived approximately 77% of its revenues in the second
quarter of fiscal 1998 from software products for IBM and IBM-compatible
mainframe computers. IBM continues to focus on reducing the overall software
costs associated with the OS/390 mainframe platform. Further, IBM continues,
directly and through third parties, to enhance its utilities for IMS and DB2 to
provide lower cost alternatives to those provided by the Company and other
independent software vendors. IBM has significantly increased its level of
activity in the IMS and DB2 high speed utility markets over the last twelve
months. The Company has traditionally maintained sufficient performance and
functional advantages over IBM's base utilities to justify its pricing
differential although there can be no assurance that it will continue to
maintain such advantages.
Fees from enterprise license transactions remain fundamental
components of the Company's revenues. In the second quarter of fiscal 1998,
enterprise license fees for future additional processing capacity and license
restructurings comprised approximately 24% of total revenues. These revenues
are dependent upon the Company's customers' continuing to perceive an
increasing need to use the Company's existing software products on
substantially greater mainframe processing capacity in future periods. The
Company believes that the demand for enterprise licenses has been driven by
customers' re-commitment over the last 24 to 36 months to the OS/390 mainframe
platform for large scale, transaction intensive information systems. Whether
this trend will continue is difficult to predict. If the Company's customers'
processing capacity growth were to slow and/or if such customers were to
perceive alternatives to relying upon the Company's current mainframe products,
the Company's revenues would be adversely impacted.
Capacity-based upgrade fees associated with both current and future
processing capacity contributed 34% of total revenues in the second quarter of
fiscal 1998. The charging of upgrade fees based on CPU tier classifications is
standard among mainframe systems software vendors, including IBM. The pricing
of mainframe systems software, including the charging of tier-based upgrade
fees or other capacity-based fees, is under constant pressure from customers.
Although the Company has adopted MIPS-based pricing for enterprise licenses, it
has not changed the fact that customers pay more to use its products on more
powerful CPU's. The Company believes its current pricing policies properly
reflect the value provided by its products. IBM provides alternatives to
tier-based pricing with respect to its large mainframe CPUs and continues to
reduce the costs of its mainframe systems software to increase the overall cost
competitiveness of its mainframe hardware and software products. These actions
continue to increase pricing pressures within the mainframe systems software
markets.
The Company's growth prospects are dependent upon many factors,
including the success of its existing client/server products and those
anticipated to be introduced in the future. The client-server systems and
application management markets in which the Company operates are far more
crowded and competitive than its traditional mainframe systems management
markets. The Company has experienced long development cycles and product
delays in the past, particularly with some of its client/server products, and
expects to have delays in the future. Delays in new mainframe or
client/server product introductions or less-than-anticipated market
acceptance of these new products
17
<PAGE> 18
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
are possible and would have an adverse affect on the Company's revenues and
earnings. New products or new versions of existing products may, despite
testing, contain undetected errors or bugs that will delay the introduction or
adversely affect commercial acceptance of such products. The enterprise systems
management market that the Company's client/server products address is
characterized by rapid change and intense competition that continues to increase
as vendors within the broader markets converge. Certain of the Company's
competitors and potential competitors have significantly greater financial,
technical, sales and marketing resources than the Company and greater experience
in client/server development and sales. A key factor in determining the success
of the Company's products, particularly its client/server offerings, will be
their ability to interoperate and perform well with existing and future leading
database management systems and other systems software products supported by the
Company's products. While the Company believes its products that address this
market, including those under development, will compete effectively, this market
will be relatively unpredictable over the next few years and there can be no
assurance that anticipated results will be achieved.
Microsoft Corporation has significantly increased its focus on
developing operating systems, systems management products and databases that
will provide "business-critical" class functionality. Specifically, Microsoft
is aggressively promoting its BackOffice(TM) family of software products,
including its Window NT Server operating system and its SQL Server relational
database management system, as lower cost alternatives to the UNIX operating
systems coupled with relational database management systems from Oracle
Corporation, Sybase, Inc., Informix Corporation and other vendors. Microsoft
could significantly lower software price points in some of the Company's
markets, which could place additional pricing pressure on the Company. The
Company has invested and intends to continue to invest in the development of
systems management products for Windows NT and BackOffice(TM) environments, but
there are numerous uncertainties associated with the Company's ability to
successfully execute this strategy.
Litigation seeking to enforce patents, copyrights and trade secrets is
increasing in the software industry. There can be no assurance that third
parties will not assert that their patent or other proprietary rights are
violated by products offered by the Company. Any such claims, with or without
merit, can be time consuming and expensive to defend and could have an adverse
effect on the Company's business, results of operations, financial position and
cash flows.
18
<PAGE> 19
BMC SOFTWARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Stockholders Meeting was held on August
25, 1997. At the meeting, the stockholders elected all of the management's
seven nominees to serve as directors for the following year. Also at the
meeting, the stockholders voted on a proposal to amend and restate the BMC
Software, Inc. 1994 Employee Incentive Plan. The proposal to amend and restate
the BMC Software, Inc. 1994 Employee Incentive Plan received 57,002,170
affirmative and 30,574,434 negative votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BMC SOFTWARE, INC.
Date: November 14, 1997 By: /s/ Max P. Watson Jr.
----------------------------------------
Max P. Watson Jr.
Chairman of the Board, President and
Chief Executive Officer
Date: November 14, 1997 By: /s/ William M. Austin
----------------------------------------
William M. Austin
Sr. Vice President and Chief
Financial Officer
Date: November 14, 1997 By: /s/ Kevin M. Klausmeyer
----------------------------------------
Kevin M. Klausmeyer
Chief Accounting Officer
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX
MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 65,929
<SECURITIES> 473,043
<RECEIVABLES> 109,213
<ALLOWANCES> 8,555
<INVENTORY> 0
<CURRENT-ASSETS> 222,385
<PP&E> 201,943
<DEPRECIATION> 58,831
<TOTAL-ASSETS> 898,809
<CURRENT-LIABILITIES> 232,623
<BONDS> 0
0
0
<COMMON> 1,050
<OTHER-SE> 573,034
<TOTAL-LIABILITY-AND-EQUITY> 898,809
<SALES> 217,947
<TOTAL-REVENUES> 321,123
<CGS> 35,719
<TOTAL-COSTS> 263,204
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 71,215
<INCOME-TAX> 36,856
<INCOME-CONTINUING> 34,359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,359
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
