<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 June 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)
<TABLE>
<S> <C>
Delaware 74-2126120
(State or other jurisdiction of (IRS Employer identification No.)
incorporation or organization)
BMC Software, Inc.
2101 CityWest Boulevard
Houston, Texas 77042
(Address of principal executive officer) (Zip Code)
</TABLE>
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 August 8, 1997, there were outstanding 101,639,277 shares of Common
Stock, par value $.01, of the registrant.
<PAGE> 2
BMC SOFTWARE, INC. AND SUBSIDIARIES
Quarter Ended June 30, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
June 30, 1997 (Unaudited) and March 31, 1997 3
Condensed Consolidated Statements of Earnings
Three months ended June 30, 1997 and 1996
(Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Three months ended June 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 8
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
----------
</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>
June 30, March 31,
ASSETS 1997 1997
---------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $100,346 $ 79,794
Investment securities 57,984 59,159
Receivables:
Trade 76,590 87,576
Interest and other 11,451 11,247
-------- --------
Total receivables 88,041 98,823
Prepaid expenses and other 10,041 10,606
-------- --------
Total current assets 256,412 248,382
-------- --------
Property and equipment, net 125,285 116,296
Software development costs, net 44,271 39,486
Purchased software, net 35,932 19,735
Finance receivables 4,621 4,397
Investment securities 411,114 402,742
Deferred charges and other assets 9,875 13,121
-------- --------
$887,510 $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)
(continued)
<TABLE>
<CAPTION>
June 30, March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
----------- ---------
(Unaudited)
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 6,686 $ 9,439
Accrued liabilities and other 78,690 50,025
Current portion of deferred revenue 155,053 145,199
-------- --------
Total current liabilities 240,429 204,663
-------- --------
Deferred revenue and other 94,095 93,284
-------- --------
Total liabilities 334,524 297,947
-------- --------
Stockholders' equity:
Common stock 1,050 1,050
Additional paid-in capital 89,632 82,391
Retained earnings 554,559 565,122
Foreign currency translation adjustment (639) (820)
Unrealized gain (loss) on securities available for sale 1,592 (750)
-------- --------
646,194 646,993
Less treasury stock 89,002 96,901
Less unearned portion of restricted stock compensation 4,206 3,880
-------- --------
Total stockholders' equity 552,986 546,212
-------- --------
$887,510 $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
June 30,
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Licenses $107,746 $ 82,630
Maintenance 50,668 43,420
-------- --------
Total revenues 158,414 126,050
-------- --------
Operating expenses:
Selling and marketing 47,401 37,526
Research and development 20,769 17,859
Cost of maintenance services and product licenses 17,515 14,014
General and administrative 11,189 10,595
Acquired research and development costs 60,272 11,259
-------- --------
Total operating expenses 157,146 91,253
-------- --------
Operating income 1,268 34,797
Other income 6,148 4,294
-------- --------
Earnings before taxes 7,416 39,091
Income taxes 17,979 11,919
-------- --------
Net earnings (loss) $(10,563) $ 27,172
======== ========
Earnings (loss) per share $ (.10) $ 0.26
======== ========
Shares used in computing earnings (loss) per share 108,083 106,238
======== ========
</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>
Three Months Ended
June 30,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(10,563) $ 27,172
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Acquired research and development costs 60,272 11,259
Depreciation and amortization 11,585 8,582
Net change in receivables,
payables and other items 26,274 14,216
-------- --------
Total adjustments 98,131 34,057
-------- --------
Net cash provided by operating activities 87,568 61,229
-------- --------
Cash flows from investing activities:
Technology acquisitions, net of cash acquired (51,187) (13,580)
Purchased software and related assets (947) (190)
Capital expenditures (12,608) (5,269)
Capitalization of software development (9,278) (5,910)
Purchases of securities held to maturity (14,498) (60,783)
Proceeds from securities held to maturity 9,643 25,415
(Increase) decrease in long-term finance receivables (224) (30,122)
-------- --------
Net cash used in investing activities (79,099) (90,439)
-------- --------
Cash flows from financing activities:
Income tax reduction relating
to stock options 6,227 --
Stock options exercised and other 6,607 5,648
Treasury stock acquired (933) (880)
-------- --------
Net cash used in financing activities 11,901 4,768
-------- --------
Effect of exchange rate changes on cash 182 (71)
-------- --------
Net change in cash and cash equivalents 20,552 (24,513)
Cash and cash equivalents at beginning of period $ 79,794 62,128
-------- --------
Cash and cash equivalents at end of period $100,346 $ 37,615
======== ========
Supplemental disclosure of cash flow information:
Cash paid for Income taxes $ 2,489 $ 16,433
</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 (Loss) Per Share
Earnings (loss) 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 (loss) 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 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 recorded a $57,267,000 charge, net of a $3,005,000 income tax benefit, for
acquired research and development costs. As of June 30, 1997 approximately
$18,335,000 of additional consideration and transaction costs relating to these
acquisitions remained unpaid.
7
<PAGE> 8
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
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 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 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
June 30,
1997 1996
---- ----
<S> <C> <C>
Revenues:
License 68.0% 65.6%
Maintenance 32.0 34.4
----- -----
Total revenues 100.0 100.0
Operating expenses:
Selling and marketing 30.0 29.8
Research and development 13.1 14.2
Cost of maintenance services
and product licenses 11.0 11.1
General and administrative 7.1 8.4
Acquired research and development costs 38.0 8.9
----- -----
Operating income .8 27.6
Other income 3.9 3.4
----- -----
Earnings before taxes 4.7 31.0
Income taxes 11.4 9.4
----- -----
Net earnings (loss) (6.7)% 21.6%
===== =====
</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
June 30,
--------
(in thousands)
1997 1996 Change
-------- -------- ------
<S> <C> <C> <C>
North American license revenues $ 75,200 $ 55,728 34.9%
International license revenues 32,546 26,902 21.0%
-------- --------
Total license revenues 107,746 82,630 30.4%
Maintenance revenues 50,668 43,420 16.7%
-------- --------
Total revenues $158,414 $126,050 25.7%
======== ========
</TABLE>
License Revenues
The Company's license revenues include product license fees, capacity-based
license upgrade fees and restructuring fees. Product license fees are generated
from the initial licensing of a product and subsequent licenses purchased under
the Company's tier-based licensing program. 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 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 67% of total license
revenues in the quarter ended June 30, 1996 and 70% for the corresponding
quarter ended June 30, 1997. The 35% increase in North American license
revenues is primarily attributable to increased capacity-based upgrade fees for
both current and future capacity. Capacity-based upgrade fees for future
capacity represented the single largest component of North American license
revenues for the quarter ended June 30, 1997. International license revenues
represented 33% and 30% of total license revenues for the quarters ended June
30, 1996 and 1997, respectively. International license revenue growth from the
first quarter of fiscal 1997 to fiscal 1998 was derived principally from
capacity-based upgrade fees associated with current capacity and from new
license sales of the Company's client/server products.
Capacity-based upgrade fees include fees for both current and future
additional processing capacity. These fees accounted for 23% and 35% of total
revenues in the first quarter of fiscal 1997 and 1998, respectively. The
sustainability and growth 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
9
<PAGE> 10
Management's Discussion and Analysis of
BMC SOFTWARE, INC. AND SUBSIDIARIES
Results of Operations and Financial Condition
(continued)
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 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 June 30, 1996 and 1997, the
enterprise license fees for future additional processing capacity and license
restructurings comprised approximately 22% and 26% of total revenues,
respectively. The fees associated with future additional mainframe processing
capacity typically comprise from one-half to substantially all of the license
fees included in the enterprise license transaction. Over the past two 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.
Maintenance and Support 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 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.
10
<PAGE> 11
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
Product Line Revenues
The Company's products for the IBM-compatible mainframe environment accounted
for 87% and 84% of total revenues in the quarters ended June 30, 1997 and 1998.
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 66% and
65% of total revenues in the first quarters of fiscal 1997 and 1998,
respectively and 64% and 65% of license revenues for the same periods. Total
revenues and license revenues from these product lines grew 25% and 33%,
respectively in the first quarter of fiscal 1998. The Company's other products
for the mainframe environment contributed 22% and 18% of total revenues and 19%
and 15% of license revenues for the quarters ended June 30, 1997 and 1998,
respectively. Both total and license revenues for the Company's other mainframe
products in the fiscal 1998 first quarter grew by approximately 4% compared to
the prior year's quarter.
The Company's client/server product lines 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. In total, these product lines contributed 13% and 16% of total
revenues for the quarters ended June 30, 1997 and 1998, respectively and 17%
and 20% of license revenues for the same periods. Total revenues for these
product lines grew 63% and license revenues grew 49% in the first quarter of
fiscal 1998.
EXPENSES
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------
(in thousands)
1997 1996 Change
-------- -------- ------
<S> <C> <C> <C>
Selling and marketing expenses $ 47,401 $ 37,526 26.3%
Research and development expenses 20,769 17,859 16.3%
Cost of maintenance services
and product licenses 17,515 14,014 25.0%
General and administrative expenses 11,189 10,595 5.6%
Acquired research and
development 60,272 11,259 435.3%
-------- -------
Total operating expenses $157,146 $91,253 72.2%
======== =======
</TABLE>
11
<PAGE> 12
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
Selling and Marketing Expenses
Selling and marketing expenses increased by 26% or $9,875,000 for the
quarter ended June 30, 1997 as compared to the quarter ended June 30, 1996.
The single largest contributor to this expense growth was personnel costs.
Personnel costs increased as the result of a 48% increase in headcount from
June 30, 1996 to June 30, 1997. Other contributors to the increase were
severance pay for terminated sales personnel in Europe and travel expenses. As a
percentage of total revenues, selling and marketing expenses remained constant
at 30% in the first quarter of fiscal 1998 when compared to the first quarter of
fiscal 1997.
Research and Development Expenses
Research and development expenses increased primarily due to the
addition of permanent and contract personnel who were hired to develop new
product offerings and, to a lesser extent, support existing products. Research
and development headcount from June 30, 1996 increased by 30%. These increases
have been offset by a 57% increase in software capitalization. For the first
quarter of fiscal 1998, the Company capitalized $9,278,000 in software
development costs. In the first quarter of fiscal 1997, the Company capitalized
$5,910,000 in software development costs. Research and development expenses
(which are net of the above-mentioned capitalized software development costs) as
a percentage of total revenues have decreased slightly from 14% in the first
quarter of fiscal 1997 to 13% in the first quarter of 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, and to significantly enhance,
fortify, expand and integrate the acquired technology. See "-Acquired Research
and Development Costs" below.
Cost of Maintenance Services and Product Licenses
Cost of maintenance services and product licenses expenses consist of
amortization of purchased and internally developed software, costs associated
with technical support operations and royalty fees. This expense line item has
increased in the first quarter of fiscal 1998 primarily as a result of
increases in technical support operations and amortization of internally
developed software. Amortization for the Company's capitalized software
totaled $4,493,000 and $3,192,000, including accelerated charges, in the first
quarter of fiscal 1998 and 1997, respectively. The Company accelerated the
amortization of some of its older products by approximately $2,900,000 and
$2,009,000 during the first quarter of fiscal 1998 and 1997, respectively. These
software products were not expected to generate sufficient future revenues which
would be required for the Company to realize the carrying value of the assets.
As a percentage of total revenues, these expenses remained constant at 11% in
the first quarters of fiscal 1997 and 1998.
12
<PAGE> 13
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
General and Administrative Expenses
The Company's general and administrative expenses increased by
$594,000, or 6%, in the first quarter of fiscal 1998 as compared to the first
quarter of fiscal 1997. The increase is primarily related to personnel costs
associated with a 4% increase in headcount. The growth in general and
administrative expenses was offset by a decrease in bonuses paid to executives
of the Company. As a percentage of total revenues, general and administrative
expenses decreased to 7% in the first quarter of fiscal 1998 from 8% in the
first quarter of fiscal 1997.
Acquired Research and Development Costs
During the first quarter of fiscal 1998, 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 million, including direct acquisition costs. The Company accounted
for these transactions using the purchase method of accounting. During the
quarter, the Company recorded a $60,272,000 charge ($57,267,000 net of income
tax benefits), for acquired research and development costs.
OTHER INCOME
For the first quarter of fiscal 1998, other income was $6,148,000,
reflecting an increase of 43% over $4,294,000 of other income in the same
quarter of fiscal 1997. Other income consists primarily of interest earned on
tax-exempt municipal securities, euro bonds, corporate bonds, mortgage
securities and money market funds. The increase in other income is primarily
due to an increase of approximately $226,000,000 in cash and investment
securities from June 30, 1996 to June 30, 1997.
INCOME TAXES
For the first quarter of fiscal 1998, income tax expense was
$17,979,000, compared to $11,919,000 for the same quarter in fiscal 1997. 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 three months ended June 30, 1997 has
decreased to 31% from 32% during the same period in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth through funds generated from
operations. As of June 30, 1997, the Company had cash, cash equivalents and
investment securities of $569,444,000.
The Company did not repurchase any shares on the open market during
the first quarter of fiscal 1998. As of June 30, 1997, the Company has
authorization from its Board of Directors, to acquire up to 4,877,300 shares of
its common stock pursuant to the Company's stock repurchase program.
13
<PAGE> 14
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
The Company believes that existing cash balances and funds generated
from operations will be sufficient to meet its liquidity requirements for the
foreseeable future.
B. FORWARD LOOKING INFORMATION AND CERTAIN RISKS AND UNCERTAINTIES THAT
COULD AFFECT FUTURE OPERATING RESULTS.
Management's Discussion and Analysis of Results of Operations and
Financial Condition include certain forward looking statements, which are
identified by the use of the words "believes," "expects" and similar
expressions that contemplate future events. 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 these
or any other forward looking statements made by, or on behalf of the Company.
There can be no assurance that future results will meet expectations. These
important factors, risks and uncertainties include, but are not limited to,
those described in the following paragraphs and in the discussion in the
Company's March 31, 1997 Annual Report under the heading "Business," including,
without limitation, the discussion under the subheading "Competition, System
Dependence."
The Company's stock price has historically been 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 and other
factors. The stock price of software companies in general, and the Company in
particular, is based on expectations of future revenue and earnings growth. Any
failure to meet anticipated revenue and earnings levels in a period would
likely have a significant adverse effect on the Company's stock price.
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.
14
<PAGE> 15
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
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 assurances 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.
The Company derived approximately 84% of its revenues in the first
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. The Company has traditionally maintained
sufficient performance and functional advantages over IBM's base utilities,
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 first quarter of fiscal 1998,
enterprise license fees for future additional processing capacity and license
restructurings comprised approximately 26% of total revenues. These revenues
are
15
<PAGE> 16
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
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 35% of total revenues in the first 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 continued pressure from customers.
Although the Company has adopted MIPS-based pricing for enterprise licenses, it
has not significantly changed the fact that customers pay more to use its
products on more powerful CPUs. 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
is attempting to reduce the costs of its mainframe systems software to increase
the overall cost competitiveness of its mainframe hardware and software
products. These actions have increased pricing pressures within the mainframe
systems software markets.
The Company's growth prospects are dependent upon the success of its
existing client/server products and those anticipated to be introduced in the
future. 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
are possible and would have an adverse effect 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.
16
<PAGE> 17
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
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 Windows 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 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.
17
<PAGE> 18
BMC SOFTWARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
18
<PAGE> 19
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.
<TABLE>
<S> <C>
BMC SOFTWARE, INC.
Date: August 14, 1997 By: /s/ Max P. Watson Jr.
---------------------
Max P. Watson Jr.
Chairman of the Board, President and
Chief Executive Officer
Date: August 14, 1997 By: /s/ William M. Austin
---------------------
William M. Austin
Senior Vice President and
Chief Financial Officer
Date: August 14, 1997 By: /s/ Kevin M. Klausmeyer
-----------------------
Kevin M. Klausmeyer
Chief Accounting Officer
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 100,346
<SECURITIES> 469,098
<RECEIVABLES> 86,932
<ALLOWANCES> (5,721)
<INVENTORY> 0
<CURRENT-ASSETS> 256,412
<PP&E> 179,374
<DEPRECIATION> (54,089)
<TOTAL-ASSETS> 887,510
<CURRENT-LIABILITIES> 240,429
<BONDS> 0
0
0
<COMMON> 1,050
<OTHER-SE> 551,936
<TOTAL-LIABILITY-AND-EQUITY> 887,510
<SALES> 107,746
<TOTAL-REVENUES> 158,414
<CGS> 17,515
<TOTAL-COSTS> 157,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,416
<INCOME-TAX> 17,979
<INCOME-CONTINUING> (10,563)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,563)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
