<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 December 31, 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 February 5, 1998, there were outstanding 102,777,632 shares of Common
Stock, par value $.01, of the registrant.
<PAGE> 2
BMC SOFTWARE, INC. AND SUBSIDIARIES
Quarter Ended December 31, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
December 31, 1997 (Unaudited) and March 31, 1997 3
Condensed Consolidated Statements of Earnings Three months and
Nine months ended December 31, 1997
and 1996 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows Nine months
ended December 31, 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 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</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>
December 31, March 31,
ASSETS 1997 1997
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 85,478 $ 79,794
Investment securities 43,218 59,159
Receivables:
Trade, net 126,660 87,576
Interest and other 13,448 11,247
-------- --------
Total receivables 140,108 98,823
Prepaid expenses and other 7,774 10,606
-------- --------
Total current assets 276,578 248,382
-------- --------
Property and equipment, net 143,909 116,296
Software development costs, net 57,776 39,486
Purchased software, net 34,577 19,735
Finance receivables 13,578 4,397
Investment securities 423,433 402,742
Deferred charges and other assets 6,153 13,121
-------- --------
$956,004 $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>
December 31, March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
---- ----
(Unaudited)
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 3,176 $ 9,439
Accrued liabilities and other 60,642 50,025
Current portion of deferred revenue 180,616 145,199
--------- ---------
Total current liabilities 244,434 204,663
--------- ---------
Deferred revenue and other 86,825 93,284
--------- ---------
Total liabilities 331,259 297,947
--------- ---------
Stockholders' equity:
Common stock 1,050 1,050
Additional paid-in capital 95,872 82,391
Retained earnings 664,258 565,122
Foreign currency translation adjustment (1,483) (820)
Unrealized gain (loss) on securities available for sale 1,082 (750)
--------- ---------
760,779 646,993
Less treasury stock 132,121 96,901
Less unearned portion of restricted stock compensation 3,913 3,880
--------- ---------
Total stockholders' equity 624,745 546,212
--------- ---------
$ 956,004 $ 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 Nine Months Ended
December 31, December 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Licenses $140,992 $103,989 $358,939 $268,644
Maintenance 55,010 46,071 158,186 133,966
-------- -------- -------- --------
Total revenues 196,002 150,060 517,125 402,610
-------- -------- -------- --------
Operating expenses:
Selling and marketing 52,836 40,094 146,974 113,355
Research and development 27,152 20,056 71,202 57,748
Cost of maintenance services
and product licenses 17,599 13,657 53,318 40,793
General and administrative 15,433 12,343 39,257 34,021
Acquired research and
development costs -- -- 65,473 11,259
-------- -------- -------- --------
Total operating expenses 113,020 86,150 376,224 257,176
-------- -------- -------- --------
Operating income 82,982 63,910 140,901 145,434
Other income 8,246 5,300 21,542 14,233
-------- -------- -------- --------
Earnings before taxes 91,228 69,210 162,443 159,667
Income taxes 26,451 21,109 63,307 49,208
-------- -------- -------- --------
Net earnings $ 64,777 $ 48,101 $ 99,136 $110,459
======== ======== ======== ========
Basic earnings per share $ .64 $ .48 $ .98 $ 1.10
======== ======== ======== ========
Shares used in computing
basic earnings per share 101,560 100,883 101,432 100,582
======== ======== ======== ========
Diluted earnings per share $ .60 $ .45 $ .92 $ 1.03
======== ======== ======== ========
Shares used in computing
diluted earnings per share 108,043 107,748 108,155 106,921
======== ======== ======== ========
</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>
Nine Months Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 99,136 $ 110,459
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Acquired research and development costs 65,473 11,259
Depreciation and amortization 43,481 23,904
Net change in receivables,
payables and other items (13,161) 57,925
--------- ---------
Total adjustments 95,793 93,088
--------- ---------
Net cash provided by operating activities 194,929 203,547
--------- ---------
Cash flows from investing activities:
Technology acquisitions, net of cash acquired (72,044) (14,714)
Purchased software and related assets (2,480) (6,825)
Capital expenditures (49,436) (20,733)
Capitalization of software development (27,621) (15,518)
Purchases of investment securities (69,547) (184,704)
Proceeds from investment securities 66,629 30,288
Increase in long-term finance receivables (9,181) (692)
--------- ---------
Net cash used in investing activities (163,680) (212,898)
--------- ---------
Cash flows from financing activities:
Earned portion of restricted stock compensation 1,098 1,204
Income tax reduction relating to stock options 27,473 2,458
Stock options exercised and other 17,231 12,029
Treasury stock acquired (70,703) (880)
--------- ---------
Net cash (used in) provided by financing (24,901) 14,811
activities --------- ---------
Effect of exchange rate changes on cash (664) (334)
--------- ---------
Net change in cash and cash equivalents 5,684 5,126
Cash and cash equivalents at beginning of period 79,794 62,128
--------- ---------
Cash and cash equivalents at end of period $ 85,478 $ 67,254
========= =========
Supplemental disclosure of cash flow information:
Cash paid for Income taxes $ 37,022 $ 53,532
</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 - Recently Issued Accounting Pronouncements
The American Institute of Certified Public Accountants issued Statement
of Position (SOP)97-2, "Software Revenue Recognition" in October 1997. SOP 97-2
is not expected to have a material impact on the Company's financial statements.
Note 3 - Earnings Per Share
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share" in February 1997.
Implementation of SFAS No. 128 is required for periods ending after December 15,
1997. SFAS No. 128 requires dual presentation of earnings per share (EPS); basic
EPS and diluted EPS. Basic EPS excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. For purposes of this calculation, outstanding stock options
and unearned restricted stock are considered common stock equivalents using the
treasury stock method. The following table summarizes the basic EPS and diluted
EPS computations for fiscal 1998 and 1997 (in thousands, except per share
amounts):
7
<PAGE> 8
BMC SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share:
Net earnings $ 64,777 $ 48,101 $ 99,136 $110,459
-------- -------- -------- --------
Weighted average number of common shares 101,560 100,883 101,432 100,582
-------- -------- -------- --------
Basic earnings per share $ 0.64 $ 0.48 $ 0.98 $ 1.10
======== ======== ======== ========
Diluted earnings per share:
Net earnings $ 64,777 $ 48,101 $ 99,136 $110,459
-------- -------- -------- --------
Weighted average number of common shares 101,560 100,883 101,432 100,582
Incremental shares from assumed conversions-
Stock options and other 6,450 6,757 6,673 6,254
Unearned restricted stock 33 108 50 85
-------- -------- -------- --------
Adjusted weighted average number of common
shares 108,043 107,748 108,155 106,921
-------- -------- -------- --------
Diluted earnings per share $ 0.60 $ 0.45 $ 0.92 $ 1.03
======== ======== ======== ========
</TABLE>
Note 4 - 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 December 31, 1997,
approximately $5,470,000 of additional consideration and transaction costs
relating to these acquisitions remained unpaid.
Note 5 - Subsequent Event
On January 31, 1998, the Company agreed to acquire BGS Systems, Inc.
for approximately $285,000,000. The Company expects to account for this
transaction using the pooling of interests method. The acquisition is expected
to close within 90 days of January 31, 1998, pending approval from the
stockholders of BGS Systems, Inc. and the Securities and Exchange Commission.
8
<PAGE> 9
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
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 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 Nine Months Ended
December 31, December 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Licenses 71.9% 69.3% 69.4% 66.7%
Maintenance 28.1 30.7 30.6 33.3
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Selling and marketing 26.9 26.7 28.4 28.2
Research and development 13.9 13.4 13.8 14.3
Cost of maintenance services
and product licenses 9.0 9.1 10.3 10.1
General and administrative 7.9 8.2 7.6 8.5
Acquired research and development costs -- -- 12.7 2.8
----- ----- ----- -----
Operating income 42.3 42.6 27.2 36.1
Other income 4.2 3.5 4.2 3.6
----- ----- ----- -----
Earnings before taxes 46.5 46.1 31.4 39.7
Income taxes 13.5 14.0 12.2 12.3
----- ----- ----- -----
Net earnings 33.0% 32.1% 19.2% 27.4%
===== ===== ===== =====
</TABLE>
9
<PAGE> 10
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
REVENUES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
(in thousands) (in thousands)
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
North American license revenues $ 84,945 $ 56,829 49% $233,344 $168,045 39%
International license revenues 56,047 47,160 19% 125,595 100,599 25%
-------- -------- -------- --------
Total license revenues 140,992 103,989 36% 358,939 268,644 34%
Maintenance revenues 55,010 46,071 19% 158,186 133,966 18%
-------- -------- -------- --------
Total revenues $196,002 $150,060 31% $517,125 $402,610 28%
======== ======== ======== ========
</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 on which the Company's products are
installed measured in millions of instructions per second ("MIPS"). 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 which effect an increase in
the discounts used to calculate future maintenance and upgrade charges for a
customer's installed products.
The Company's North American operations generated 60% and 55% of total
license revenues in the quarters ended December 31, 1997 and 1996, respectively,
and 65% and 63% of total license revenues in the nine-month periods ending on
such dates, respectively. Year-over-year growth in North American license
revenues in the third quarter of fiscal 1998 over the third quarter of fiscal
1997 was principally from product license fees generated from the Company's
client server products and to a lesser extent, increased capacity-based upgrade
fees for future capacity. For the nine months ended December 31, 1997, the 39%
increase in North American license revenues over the prior year is primarily
attributable to product license fees generated from the Company's client-server
products and increased capacity-based upgrade fees for both current and future
capacity. International license revenues represented 40% and 45% of total
license revenues in the quarters ended December 31, 1997 and 1996, respectively,
and 35% and 37% of total license revenues in the nine-month periods ending on
such dates, respectively. International license revenue growth from the three
month period ended December 31, 1996 to the three month period ended December
31, 1997 was derived principally from capacity-based upgrade fees for future
capacity, and to a lesser extent, product license fees generated from the
Company's client-server products. In the nine months ended December 31, 1997,
the 25% increase in International license revenues over the prior year is
primarily attributable to
10
<PAGE> 11
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
product license fees generated from the Company's client-server products, and to
a lesser extent, capacity-based upgrade fees for future capacity.
Capacity-based upgrade fees include fees for both current and
anticipated future additional processing capacity. These fees accounted for 29%
and 28% of total revenues in the quarters ended December 31, 1997 and 1996,
respectively, and 32% and 27% of total revenues for the respective nine-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. 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. In the quarters ended December 31, 1997 and
1996, the enterprise license fees for future additional processing capacity and
license restructurings comprised approximately 25% and 18% of total revenues,
respectively, and comprised 25% and 22% of total revenues in the respective
nine-month periods. 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, there can be no
assurance that the demand for mainframe processing capacity will continue at
current levels. Should this trend slow 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
11
<PAGE> 12
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
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.
PRODUCT LINE REVENUES
The Company's products for the IBM-compatible mainframe environment
accounted for 69% and 80% of total revenues in the quarters ended December 31,
1997 and 1996, and 76% and 83% of total revenues, respectively, in the
nine-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 revenues. These product lines accounted for 53% of
total revenues and 48% of license revenues in the quarter ended December 31,
1997 and 59% and 56% of total and license revenues in the respective nine-month
periods. Total revenues and license revenues from these product lines grew 9%
and 7%, respectively, in the third quarter of fiscal 1998, and grew 17% and 18%
in the nine-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 third quarter of fiscal
1998, and contributed 17% and 14% of total and license revenues, respectively,
in the nine-month period of fiscal 1998. Total revenues for the Company's other
mainframe products in the fiscal 1998 third quarter grew by 29% and license
revenues grew by 49% in the same period.
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 31% of total revenues and
38% of license revenues in the quarter ended December 31, 1997, and 24% and 30%
of total and license revenues, respectively, in the nine-month period. Total
revenues for these product lines grew 105% and license revenues grew 98% in the
third quarter of fiscal 1998, compared to the comparable, prior year quarter.
12
<PAGE> 13
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 Nine Months Ended
December 31, December 31,
------------ ------------
(in thousands) (in thousands)
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing $ 52,836 $ 40,094 32% $146,974 $113,355 30%
Research and development 27,152 20,056 35% 71,202 57,748 23%
Cost of maintenance services
and product licenses 17,599 13,657 29% 53,318 40,793 31%
General and administrative 15,433 12,343 25% 39,257 34,021 15%
Acquired research and
development -- -- N/A 65,473 11,259 482%
-------- -------- -------- --------
Total operating expenses $113,020 $ 86,150 $376,224 $257,176
======== ======== ======== ========
</TABLE>
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased year-over-year by 32% or
$12,742,000 for the quarter ended December 31, 1997, and by 30% or $33,619,000
for the nine month period ended December 31, 1997. The single largest
contributor to this expense growth for both the three month and nine month
periods ending December 31, 1997 was personnel costs. Personnel costs increased
as the result of a 54% increase in headcount from December 31, 1996 to December
31, 1997, which was primarily attributable to significant increases in the
Company's open systems sales representatives, including the 37 sales
representatives obtained with the DataTools, Inc. acquisition in the June 1997
quarter. Other contributors to the increase were expenses associated with sales
and distributor commissions, accelerated depreciation relating to certain
computer equipment, trade shows and travel. As a percentage of total revenues,
selling and marketing expenses remained relatively constant ranging from 27% to
28% for the three and nine month periods ended December 31, 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.
Research and development headcount from December 31, 1996 to December 31, 1997
increased by 33%. These expense increases have been partially offset by
increases in software capitalization in both the quarter and nine months ended
December 31, 1997. For the third quarter of fiscal 1998, the Company capitalized
$8,963,000 in software development costs as compared to $5,230,000 in the
year-ago quarter. The Company capitalized $27,621,000 and $15,518,000 in
software development costs during the nine months ended December 31, 1997 and
1996, respectively. The Company
13
<PAGE> 14
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
capitalizes its software development costs when the projects under development
reach technological feasibility as defined by SFAS 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. Research and development
expenses (which are reported net of the above-mentioned capitalized software
development costs) as a percentage of total revenues have increased slightly
from 13% in the third quarter of fiscal 1997 to 14% in the third quarter of
fiscal 1998, and remained constant at 14% in the nine month periods in fiscal
1997 and 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. 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 the maintenance, enhancement and support of the Company's products and
royalty fees. This expense line item has increased in the three and nine months
ended December 31, 1997 primarily as a result of increases in amortization of
internally developed software and in maintenance, enhancement and support
activities. Amortization for the Company's capitalized software totaled
$4,106,000 and $1,970,000, including accelerated charges discussed below, in the
third quarter of fiscal 1998 and 1997, respectively. The Company's amortization
of internally developed software costs totaled $13,000,000 and $6,274,000 during
the nine months ended December 31, 1997, and 1996, respectively. The Company
accelerated the amortization of some of its older products by approximately
$1,925,000 during the third quarter of fiscal 1998, versus $750,000 in the third
quarter of fiscal 1997, and by approximately $7,564,000 and $2,759,000 in the
respective nine-month periods. These software products were not expected to
generate future revenues sufficient to justify their carrying value. As a
percentage of total revenues, cost of maintenance services and product licenses
remained constant at 9% and 10% in the third quarters of fiscal 1998 and 1997
and the nine month periods of fiscal 1998 and fiscal 1997, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company's general and administrative expenses increased by
$3,090,000 or 25% in the third quarter of fiscal 1998 as compared to the third
quarter of fiscal 1997 and increased by $5,236,000 or 15% compared to the prior
fiscal years' nine-month period. Professional fees and accelerated depreciation
charges associated with certain computer equipment were the primary contributors
to the growth in general and administrative expenses for the three and nine
months ended December 31, 1997, respectively. As a percentage of total revenues,
general and administrative expenses remained constant at 8% in the third
quarters of fiscal 1998 and 1997 and decreased from 9% in the nine-month period
in fiscal 1997 to 8% in the nine-month period in fiscal 1998.
14
<PAGE> 15
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 third quarter of fiscal 1998, other income was $8,246,000,
reflecting an increase of 56% over $5,300,000 of other income in the same
quarter of fiscal 1997. Other income increased by 51% to $21,542,000 in the
nine-month period in fiscal 1998, from $14,233,000 in the nine-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 third quarter of fiscal 1998, income tax expense was
$26,451,000, compared to $21,109,000 for the same quarter in fiscal 1997. Income
tax expense was $63,307,000 and $49,208,000 for the nine-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 nine months ended
December 31, 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 December 31, 1997, the Company had cash, cash equivalents and
investment securities of $552,129,000.
The Company effectively repurchased 572,000 of its shares during the
third quarter of fiscal 1998. As of December 31, 1997, the Company has
authorization from its Board of Directors, to acquire up to 3,764,800 shares of
its common stock pursuant to the Company's stock repurchase program. However,
the Company anticipates that in connection with the proposed acquisition of BGS
Systems discussed in Note 4, its Board of Directors will rescind the stock
repurchase program. This will be necessary in order to utilize pooling of
interests accounting for the transaction.
15
<PAGE> 16
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.
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 December 31, 1997, are not necessarily indicative of results for the
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's
current valuation reflects expectations based in part on these higher rates of
growth. 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
16
<PAGE> 17
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 an immediate,
material adverse effect on net revenues and operating results, which would
likely result in a precipitous drop in its stock price.
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.
In the nine months ended December 31, 1997, the Company announced several
executive management and organizational changes, including its Chief Operating
Officer, Senior Vice President, Research and Development, and Senior Vice
President, European Sales. 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.
Future operating results are also dependent on sustained performance
improvement by the Company's international offices, particularly its European
operations. Revenue growth by the Company's European operations has been slower
than revenue growth in North America, and in an effort to improve its European
performance, the Company has recently replaced the head of its European
operations. There can be no assurance that the Company will be successful in
accelerating the revenue growth of its European operations. The Company's
operations and financial results internationally could be significantly
adversely affected by several risks 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. In particular, the recent
Asian economic crisis has resulted in customer budget cuts and financial
uncertainty. Approximately 5% of the Company's revenues are generated in the
Pacific Rim region.
The Company derived approximately 69% of its revenues in the third quarter
of fiscal 1998 from software products for IBM and IBM-compatible mainframe
computers; approximately 53% of total revenues and a higher percentage of
earnings were contributed by the Company's high speed utilities for IMS and DB2
administration products. 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
17
<PAGE> 18
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 third quarter of fiscal 1998, enterprise license
fees for future additional processing capacity and license restructurings
comprised approximately 25% 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 29% of total revenues in the third quarter of
fiscal 1998. The charging of upgrade fees based on CPU tier classifications is
standard among mainframe systems software vendors, including IBM. While the
Company believes its current pricing policies properly reflect the value
provided by its products, the pricing of mainframe systems software is under
constant pressure from customers and competitive vendors, including IBM. IBM
continues to reduce the costs of its mainframe systems software to increase the
overall cost competitiveness of its mainframe hardware and software products.
IBM also generally charges significantly less for its software products. These
actions continue to increase pricing pressures within the mainframe systems
software markets.
The Company's growth prospects depend heavily on the continued success of
its existing client/server products, including PATROL, 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 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.
Maintaining this interoperability has greatly increased the complexity of the
Company's product development and support activities. 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
18
<PAGE> 19
additional pricing pressure on the Company. Further, Microsoft could choose to
develop competing products for use within Microsoft environments. 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.
The Company is designing and testing the most current versions of its
products to process Year 2000 data without interruption or errors and believes
that these versions are substantially Year 2000 compliant. The Company may
experience migration costs for customers who are not running current levels of
its products. The Company is continually testing its products to assure Year
2000 support and compliance; there can be no assurance, however, that despite
such testing, undetected errors or defects will not exist that could cause a
product to fail to process Year 2000 data correctly. The Company's products are
typically used in high volume information systems that are critical to a
customer's operations, so that business interruptions, loss or corruption of
data or other major problems could have significant adverse consequences to the
customer. At this time, the Company is not aware of any material operational
issues or costs associated with Year 2000 compliance of its own products. The
Company is also unaware of any potential material liabilities or operational
difficulties associated with Year 2000 compliance of its own internal
information systems.
19
<PAGE> 20
BMC SOFTWARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Form 8-K on February 4, 1998 relating to its
expected acquisition of BGS Systems, Inc. (BGS).
20
<PAGE> 21
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: February 13, 1998 By: /s/ MAX P. WATSON JR.
----------------- ---------------------------------
Max P. Watson Jr.
Chairman of the Board, President and
Chief Executive Officer
Date: February 13, 1998 By: /s/ WILLIAM M. AUSTIN
----------------- ---------------------------------
William M. Austin
Sr. Vice President and Chief
Financial Officer
Date: February 13, 1998 By: /s/ KEVIN M. KLAUSMEYER
----------------- ---------------------------------
Kevin M. Klausmeyer
Chief Accounting Officer
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 85,478
<SECURITIES> 466,651
<RECEIVABLES> 145,427
<ALLOWANCES> 5,189
<INVENTORY> 0
<CURRENT-ASSETS> 276,578
<PP&E> 211,912
<DEPRECIATION> 68,003
<TOTAL-ASSETS> 956,004
<CURRENT-LIABILITIES> 244,434
<BONDS> 0
0
0
<COMMON> 1,050
<OTHER-SE> 623,695
<TOTAL-LIABILITY-AND-EQUITY> 956,004
<SALES> 358,939
<TOTAL-REVENUES> 517,125
<CGS> 53,318
<TOTAL-COSTS> 376,224
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 162,443
<INCOME-TAX> 63,307
<INCOME-CONTINUING> 99,136
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,136
<EPS-PRIMARY> .98
<EPS-DILUTED> .92
(NOTE) The extracted information above identified as "EPS-PRIMARY" and
"EPS-DILUTED" represents basic earnings per share (EPS) and diluted EPS,
respectively, calculated in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share."
</TABLE>
