<PAGE> 1
- --------------------------------------------------------------------------------
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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, 1998
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: 0-22712
VERITAS SOFTWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-2823068
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
1600 PLYMOUTH STREET
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 335-8000
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES AND REGISTRANT'S
TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's Common Stock outstanding on July
31, 1998 was 47,160,156 shares.
- --------------------------------------------------------------------------------
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<PAGE> 2
VERITAS SOFTWARE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................. 3
Condensed Consolidated Balance Sheets as of June 30, 1998 3
and
December 31, 1997...........................................
Condensed Consolidated Statements of Operations for the 4
Three Months
and Six Months Ended June 30, 1998 and 1997.................
Condensed Consolidated Statements of Cash Flows for the Six 5
Months
Ended June 30, 1998 and 1997................................
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Results of Operation 8
and Financial Condition.....................................
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 25
Item 6. Exhibits and Reports on Form 8-K............................ 25
Signature.............................................................. 26
</TABLE>
2
<PAGE> 3
PART I CONDENSED CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 85,266 $ 75,629
Short-term investments.................................... 124,367 115,131
Accounts receivable, net of allowance for doubtful
accounts of
$1,760 at June 30, 1998 and $1,597 at December 31,
1997................................................... 37,706 30,296
Prepaid expenses.......................................... 6,659 4,298
-------- --------
Total current assets................................... 253,998 225,354
Property and equipment, net................................. 17,469 10,109
Other assets................................................ 6.915 6,417
-------- --------
Total assets...................................... $278,382 $241,880
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,699 $ 1,552
Accrued compensation and benefits......................... 6,978 6,595
Other accrued liabilities................................. 18,042 11,180
Deferred revenue.......................................... 20,312 17,449
-------- --------
Total current liabilities.............................. 49,031 36,776
Deferred rent............................................... 839 911
Convertible subordinated notes.............................. 100,000 100,000
Stockholders' equity
Common stock.............................................. 192,743 185,887
Accumulated deficit....................................... (63,468) (81,064)
Deferred compensation..................................... (48) (64)
Accumulated other comprehensive income.................... (715) (566)
-------- --------
Total stockholders' equity............................. 128,512 104,193
-------- --------
Total liabilities and stockholders' equity........ $278,382 $241,880
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue:
User license fees................................. $38,337 $23,164 $69,026 $43,687
Services.......................................... 9,328 4,364 16,728 8,036
Porting........................................... 448 1,406 1,441 2,821
------- ------- ------- -------
Total net revenue......................... 48,113 28,934 87,195 54,544
Cost of revenue:
User license fees................................. 3,130 841 5,096 1,677
Services.......................................... 4,147 1,625 7,572 2,830
Porting........................................... 645 878 1,720 1,607
------- ------- ------- -------
Total cost of revenue..................... 7,922 3,344 14,388 6,114
------- ------- ------- -------
Gross profit........................................ 40,191 25,590 72,807 48,430
Operating expenses:
Selling and marketing............................. 16,950 10,356 30,009 19,618
Research and development.......................... 8,948 6,512 16,497 12,306
General and administrative........................ 2,242 2,080 4,412 4,215
Merger related costs.............................. -- 8,490 -- 8,490
In-process research and development............... 2,250 -- 2,250 --
------- ------- ------- -------
Total operating expenses.................. 30,390 27,438 53,168 44,629
------- ------- ------- -------
Income (loss) from operations....................... 9,801 (1,848) 19,639 3,801
Interest expense.................................... (1,429) (9) (2,849) (9)
Interest and other income, net...................... 2,867 844 5,552 1,679
------- ------- ------- -------
Income (loss) before income taxes................... 11,239 (1,013) 22,342 5,471
Provision for income taxes.......................... 2,698 669 4,746 1,736
------- ------- ------- -------
Net income (loss)................................... $ 8,541 $(1,682) $17,596 $ 3,735
======= ======= ======= =======
Net income (loss) per share -- basic................ $ 0.18 $ (0.04) $ 0.38 $ 0.08
======= ======= ======= =======
Net income (loss) per share -- diluted.............. $ 0.17 $ (0.04) $ 0.34 $ 0.08
======= ======= ======= =======
Shares used in per share calculations -- basic...... 46,862 45,492 46,648 45,356
======= ======= ======= =======
Shares used in per share calculations -- diluted.... 51,354 45,492 51,151 48,704
======= ======= ======= =======
</TABLE>
All share and per share data applicable to prior periods has been restated to
give retroactive effect to a 3 for 2 stock split effected on May 20, 1998.
See accompanying notes.
4
<PAGE> 5
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 17,596 $ 3,735
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 2,571 1,842
Amortization of bond issuance costs....................... 214 --
Deferred rent............................................. (72) --
In-process research and development....................... 2,250 --
Non-cash merger related costs............................. -- 1,218
Changes in operating assets and liabilities:
Accounts receivable....................................... (7,459) (11,197)
Prepaid expenses.......................................... (2,440) (321)
Other assets.............................................. (715) (23)
Accounts payable.......................................... 2,128 285
Accrued compensation and benefits......................... 396 1,539
Other accrued liabilities................................. 5,878 3,032
Deferred revenue.......................................... 2,870 2,400
--------- --------
Net cash provided by operating activities......... 23,217 2,510
INVESTING ACTIVITIES
Purchases of short-term investments......................... (161,704) (43,574)
Sales of short-term investments............................. 152,458 48,336
Purchase of property and equipment.......................... (10,005) (3,391)
Payments received on note................................... -- 117
Purchase of Windward Technologies, Inc...................... (1,250) --
--------- --------
Net cash provided by (used for) investing
activities...................................... (20,501) 1,488
FINANCING ACTIVITIES
Payments of notes payable................................... -- (612)
Payments on notes receivable from stockholders.............. -- 48
Proceeds from issuance of common stock...................... 6,859 2,146
--------- --------
Net cash provided by financing activities......... 6,859 1,582
Effect of exchange rate changes............................. 62 74
--------- --------
Net increase in cash and cash equivalents......... 9,637 5,654
Cash and cash equivalents at beginning of period............ 75,629 17,411
--------- --------
Cash and cash equivalents at end of period.................. $ 85,266 $ 23,065
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 2,889 $ 4
Cash paid for taxes......................................... $ 829 $ 766
</TABLE>
See accompanying notes.
5
<PAGE> 6
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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 annual
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. The results for the interim periods presented are not
necessarily indicative of the results that may be expected for any future
period. The following information should be read in conjunction with the
financial statements and notes thereto included in the VERITAS Software
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997.
VERITAS Software Corporation, a Delaware corporation (the "Company")
acquired OpenVision Technologies, Inc. ("OpenVision") on April 25, 1997 ("the
Merger"). The Merger was accounted for as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting principles.
The Company's consolidated financial statements for prior periods have been
restated to include the financial position, results of operations and cash flows
of OpenVision.
2. STOCK SPLIT
All share and per share data applicable to prior periods has been restated
to give retroactive effect to a 3 for 2 stock split effected on May 20, 1998.
3. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
4. NET INCOME PER SHARE
Basic earnings per share is based upon weighted-average common shares
outstanding. Diluted earnings per share is computed using the weighted-average
common shares outstanding plus any potential dilutive securities. Dilutive
securities include stock options, warrants, restricted stock, convertible debt
and convertible preferred stock. The following table sets forth the computation
of basic and diluted net income (loss) per common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)................................. $ 8,541 $(1,682) $17,596 $ 3,735
======= ======= ======= =======
Denominator:
Denominator for basic net income (loss) per
share -- weighted-average shares............... 46,862 45,492 46,648 45,356
Common stock equivalents.......................... 4,492 -- 4,503 3,348
------- ------- ------- -------
Denominator for diluted net income (loss) per
share.......................................... 51,354 45,492 51,151 48,704
======= ======= ======= =======
Basic earnings per share............................ 0.18 (0.04) 0.38 0.08
======= ======= ======= =======
Diluted earnings per share.......................... 0.17 (0.04) 0.34 0.08
======= ======= ======= =======
</TABLE>
6
<PAGE> 7
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
For the three months ended June 30, 1997 diluted earnings per share is
considered to be the same as basic earnings per share, since the effect of
certain potentially dilutive securities would be antidilutive.
4. ACCUMULATED OTHER COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no significant
impact on the Company's net income or stockholders' equity. SFAS 130 requires
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income.
Total comprehensive income (loss) amounted to approximately $8.5 million
and $(1.7) million for the three months ended June 30, 1998 and 1997,
respectively, and approximately $17.4 million and $3.6 million for the six
months ended June 30, 1998 and 1997, respectively. The following are the
components of comprehensive income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1998 1997 1998 1997
------- -------- ------- ------
<S> <C> <C> <C> <C>
Net income (loss)..................................... $8,541 $(1,682) $17,596 $3,735
Foreign currency translation adjustments.............. (66) (4) (149) (119)
------ ------- ------- ------
Comprehensive income (loss)........................... $8,475 $(1,686) $17,447 $3,616
====== ======= ======= ======
</TABLE>
5. ACQUISITION OF WINDWARD TECHNOLOGIES, INC.
On May 15, 1998 the Company acquired all of the outstanding stock of
Windward Technologies, Inc. ("Windward"), a company that develops failure
prediction software, for a total cost of $2.5 million. The transaction was
accounted for using purchase accounting. Of the total cost, $2.3 million was
allocated to in-process research and development and was expensed in the second
quarter of 1998 and $0.2 million was allocated to acquired intangibles which
will be amortized over a five year period. Total cash outflows in the second
quarter of 1998 related to this purchase were $1.3 million. The Company has
agreed to pay the sole shareholder of Windward certain earn-out payments of up
to an aggregate of $1.2 million over the next two years subject to satisfaction
of certain conditions and has further agreed to pay such shareholder a royalty
on certain future product revenue derived from the products acquired over a five
year period, up to a maximum of $2.5 million. The Consolidated Statements of
Operations include the results of operations of Windward subsequent to the
acquisition date. For the three months and six months ended June 30, 1998 and
1997 the results of operations of Windward were not material to the Company.
7
<PAGE> 8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended, that involve risks and
uncertainties. Such forward-looking statements consist of statements that are
not purely historical, including, without limitation, statements regarding the
Company's expectations, beliefs, intentions or strategies regarding the future.
All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statement. There are certain
important factors that could cause actual results to differ materially from
those projected in the forward-looking statements contained in the following
discussion. Among such important factors are: (i) the timing and level of sales
by original equipment manufacturers ("OEMs") of computer systems incorporating
the Company's products and resales by OEMs of the Company's products; (ii) the
Company's timely development and market acceptance of new products; (iii) the
unpredictability of the timing and level of sales to resellers and direct
end-users; (iv) the timely creation and market acceptance of versions of the
Company's products for the Microsoft Windows NT operating system ("Windows NT");
(v) the timely release by Microsoft of the next version of Windows NT ("Windows
NT 5.0") and the rate of adoption of such new version by users; (vi) the impact
of Windows NT and other operating systems on the UNIX market upon which the
Company's current products are dependent; (vii) the reliance on OEMs to continue
porting and shipping the Company's products; (viii) the impact of competitive
products and pricing; (ix) the uncertainty of the labor market and local
regulations in India, where a subsidiary of the Company, which performs research
and development activities, is located; (x) the Company's ability to hire, train
and retain research and development, marketing and sales personnel with
appropriate skills in a highly competitive labor market; (xi) the Company's
ability to deliver products that are Year 2000 compliant; and (xii) the degree
to which customers and potential customers of the Company direct resources to
their own Year 2000 compliance issues, resulting in deferral of purchases of the
Company's products and services and (xiii) such risks and uncertainties as are
detailed from time to time in the Company's SEC reports and filings, including
its Annual Report on Form 10-K for the year ended December 31, 1997.
RESULTS OF OPERATIONS
OVERVIEW
VERITAS Software Corporation ("VERITAS" or the "Company") is the leading
independent supplier of enterprise data storage management solutions, providing
advanced storage management software for open system environments. The Company's
products provide performance improvement and reliability enhancement features
that are critical for many commercial applications. These products enable
protection against data loss and file corruption, rapid recovery after disk or
system failure, the ability to process large files efficiently and the ability
to manage and back-up large networks of systems without interrupting users. In
addition, the Company's products provide an automated failover between computer
systems organized in clusters sharing disk resources. The Company's highly
scalable products can be used independently, and certain products can be
combined to provide interoperable client/server storage management solutions.
The Company's products offer centralized administration with a high degree of
automation, enabling customers to manage complex, distributed environments
cost-effectively by increasing system administrator productivity and system
availability. The Company also provides a comprehensive range of services to
assist customers in planning and implementing storage management solutions. The
Company markets its products and associated services to OEM and end-user
customers through a combination of direct and indirect sales channels
(resellers, value-added resellers ("VARs"), hardware distributors, application
software vendors and systems integrators). The Company's OEM customers include
Digital Equipment Corporation ("DEC"), Hewlett-Packard Company ("HP"), Sun
Microsystems, Inc. ("Sun Microsystems"), Microsoft Corporation ("Microsoft"),
Sequent Computer Systems, Inc. and Tandem Computers, Inc. The Company's end-user
customers include AT&T Corporation, Lucent, Bank of America, Morgan Stanley,
BMW, Boeing Company, British Telecommunications plc, Chrysler Corporation and
Motorola, Inc.
8
<PAGE> 9
The Company derives its net revenue from user license fees, service fees
and porting fees. The Company's OEM customers either bundle the Company's
products with the OEM products licensed by such OEMs or offer them as options.
Certain OEMs also resell the Company's products. The Company generally receives
a one-time source license fee upon entering into a license agreement with an
OEM, as well as a user license fee each time the OEM licenses a copy of the OEM
products to a customer that incorporates one or more of the Company's products.
The Company's license agreements with its OEM customers generally contain no
minimum sales requirements and there can be no assurance that any OEM will
either commence or continue shipping operating systems incorporating the
Company's products in the future. Moreover, following the execution of new
agreements between the Company and OEM customers and resellers, a significant
period of time may elapse before any revenues to the Company are generated
thereunder due to the development work which the Company must generally
undertake pursuant to such agreements and the time needed for the sales and
marketing organizations within such customers and distributors to become
familiar with and gain confidence in the Company's products.
The Company's services revenue consists of fees derived from annual
maintenance agreements, and from consulting and training services. The OEM
maintenance agreements covering VERITAS products provide for technical and
emergency support and minor product upgrades for a fixed annual fee. The
maintenance agreements covering products that are licensed through non-OEM
channels provide for technical support and product upgrades for an annual
service fee based on the number of user licenses purchased.
Porting fees consist of fees derived from porting and other non-recurring
engineering efforts when the Company ports (i.e., adapts) its storage management
products to an OEMs' operating system and when the Company develops certain new
product features or extensions of existing product features at the request of a
customer. In most cases, the Company retains the rights to technology derived
from porting and non-recurring engineering work for licensing to other customers
and therefore generally does such work on a relatively low, and sometimes
negative, margin.
The Company's international sales are generated primarily through its
international sales subsidiaries. International revenue outside the United
States and Canada, most of which is collectible in foreign currencies, accounted
for 21% and 22% of the Company's total revenues for the six months ended June
30, 1998 and 1997, respectively. The Company's international revenue increased
54% from $11.9 million for the six months ended June 30, 1997 to $18.3 million
for the six months ended June 30, 1998. Since much of the Company's
international operating expenses are also incurred in local currencies, the
relative impact of exchange rates on net income or loss is less than on
revenues. Although the Company's operating and pricing strategies take into
account changes in exchange rates over time, the Company's operating results may
be significantly affected in the short term by fluctuations in foreign currency
exchange rates. The Company believes that its success depends upon continued
expansion of its international operations. The Company currently has sales and
service offices in the United States, Canada, Japan, the United Kingdom,
Germany, France, Sweden and the Netherlands, a development center in India, and
resellers located in North America, Europe, Asia Pacific, South America and the
Middle East. International expansion may require the Company to establish
additional foreign offices, hire additional personnel and recruit additional
international resellers, resulting in the diversion of significant management
attention and the expenditure of financial resources. To the extent the Company
is unable to effect these additions efficiently, growth in international sales
will be limited, which would have a material adverse effect on the Company's
business, operating results and financial condition. International operations
also subject the Company to a number of risks inherent in developing and selling
products outside the United States including potential loss of developed
technology, limited protection of intellectual property rights, imposition of
government regulation, imposition of export duties and restrictions, cultural
differences in the conduct of business, and political and economic instability.
The Company merged with OpenVision Technologies, Inc. ("OpenVision") on
April 25, 1997 (the "Merger"). The Merger was accounted for as a "pooling of
interests" for financial reporting purposes in accordance with generally
accepted accounting principles. The Company's consolidated financial statements
for prior periods have been restated to include the financial position, results
of operations and cash flows of OpenVision. Accordingly, the following
discussion reflects the combined results of the Company and OpenVision for all
periods covered.
9
<PAGE> 10
The following tables set forth the percentage of total revenue represented
by certain line items from the Company's condensed consolidated statement of
operations for the three months and six months ended June 30, 1998 and 1997,
respectively, and the percentage change between the comparative periods:
<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL REVENUE PERCENTAGE CHANGE
----------------------- ---------------------
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
1998 1997 1998 COMPARED TO 1997
------ ------ ---------------------
<S> <C> <C> <C>
Net revenue:
User license fees.................................... 80% 80% 66%
Services............................................. 19 15 114%
Porting.............................................. 1 5 (68)%
---- ---- ----
Total revenue................................ 100 100 66%
Cost of revenue:
User license fees.................................... 6 3 272%
Services............................................. 9 6 155%
Porting.............................................. 1 3 (27)%
---- ---- ----
Total cost of revenue........................ 16 12 137%
---- ---- ----
Gross profit........................................... 84 88 57%
Operating expenses:
Selling and marketing................................ 35 36 64%
Research and development............................. 19 23 37%
General and administrative........................... 5 7 8%
Merger related costs................................. -- 29 n/m
In-process research and development.................. 5 -- n/m
---- ---- ----
Total operating expenses..................... 64 95 11%
---- ---- ----
Income (loss) from operations.......................... 20 (7)
Other income, net...................................... 3 3
Provision for income taxes............................. (5) (2)
---- ----
Net income (loss)...................................... 18% (6)%
==== ====
Gross margin:
User license fees.................................... 92% 96%
Services............................................. 56% 63%
Porting.............................................. (44)% 38%
</TABLE>
- ---------------
n/m = not meaningful
10
<PAGE> 11
<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL REVENUE PERCENTAGE CHANGE
---------------- ---------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ---------------------
1998 1997 1998 COMPARED TO 1997
----- ----- ---------------------
<S> <C> <C> <C>
Net revenue:
User license fees...................................... 79% 80% 58%
Services............................................... 19 15 108%
Porting................................................ 2 5 (49)%
---- ---
Total revenue.................................. 100 100 60%
Cost of revenue:
User license fees...................................... 6 3 204%
Services............................................... 9 5 168%
Porting................................................ 2 3 (7)%
---- ---
Total cost of revenue.......................... 17 11 135%
---- ---
Gross profit............................................. 83 89 50%
Operating expenses:
Selling and marketing.................................. 34 36 53%
Research and development............................... 19 22 34%
General and administrative............................. 5 8 5%
Merger related costs................................... -- 16 n/m
In-process research and development.................... 2 -- n/m
---- ---
Total operating expenses....................... 60 82 19%
---- ---
Income from operations................................... 23 7
Other income, net........................................ 3 3
Provision for income taxes............................... (6) (3)
---- ---
Net income............................................... 20% 7%
==== ===
Gross margin:
User license fees...................................... 93% 96%
Services............................................... 55% 65%
Porting................................................ (19)% 43%
</TABLE>
- ---------------
n/m = not meaningful
Net Revenue
Total net revenue increased 66% from $28.9 million for the three months
ended June 30, 1997, to $48.1 million for the three months ended June 30, 1998,
and increased 60% from $54.5 million for the six months ended June 30, 1997, to
$87.2 million for the six months ended June 30, 1998. The Company believes that
the percentage increases in total revenue achieved in these periods are not
necessarily indicative of future results. The Company's revenue is comprised of
user license fees, service revenue and porting and source fees. Growth in user
license fees has been driven primarily by increasing market acceptance of the
Company's products, introduction of new products and a larger percentage of
total license revenue coming through the direct sales channel. Service revenue
is derived primarily from contracts for software maintenance and technical
support and, to a lesser extent, consulting and training services. The growth in
service revenue has been driven primarily by increased sales of service and
support contracts on new license sales and, to a lesser extent, by increasing
renewals of these contracts as the Company's installed base of licensees has
increased along with increases in demand and the ability to deliver consulting
and training services. Porting fees are derived from the Company's funded
development efforts that are typically associated with the licensing of source
code to OEMs. User license fees for the three months ended June 30, 1998 and
1997 comprised 80% of total net revenue. User license fees for the six months
ended June 30, 1998 and the six months ended June 30, 1997 were 79% and 80% of
total net revenue, respectively.
11
<PAGE> 12
User license fees. User license fees increased 66% from $23.2 million for
the three months ended June 30, 1997 to $38.3 million for the three months ended
June 30, 1998. User license fees increased 58% from $43.7 million for the six
months ended June 30, 1997 to $69.0 million for the six months ended June 30,
1998. The increases were primarily the result of continued growth in market
acceptance of the Company's products and, to a lesser extent, the introduction
of new products. In particular, the Company's user license fees from storage
products increased by approximately 66% for the six months ended June 30, 1998
as compared to the six month period ended June 30, 1997, accounting for 94% and
89% of user license fees in the six months ended June 30, 1998 and 1997,
respectively.
Service Revenue. Service revenue increased 114% from $4.4 million for the
three months ended June 30, 1997 to $9.3 million for the three months ended June
30, 1998, and increased 108% from $8.0 million for the six months ended June 30,
1997 to $16.7 million for the six months ended June 30, 1998, primarily due to
increased sales of service and support contracts on new licenses, renewal of
service and support contracts on existing licenses and, to a lesser extent, an
increase in training and consulting services. Sales of service and support
contracts increased 135% and 123% and revenue from consulting and training
services increased 74% and 77% for the three months and six months ended June
30, 1998, respectively, compared to the comparable periods ended June 30, 1997.
Porting Fees. Porting fees decreased from $1.4 million for the three months
ended June 30, 1998, to $0.4 million for the three months ended June 30, 1998
and decreased from $2.8 million for the six months ended June 30, 1997 to $1.4
million for the six months ended June 30, 1998. Porting fees related to the
efforts incurred in supporting the development efforts of the Company required
in connection the Company's agreement with Microsoft for which revenue is being
recognized under the percentage of completion method, were greater in the three
month and six month periods ended June 30, 1997 than in the comparable periods
ended June 30, 1998.
Cost of Revenue
Cost of user license fees consists primarily of royalties, media, manuals
and distribution costs. Cost of service revenue consists primarily of
personnel-related costs in providing maintenance, technical support, consulting
and training to customers. Cost of porting fees consists primarily of
personnel-related costs for development efforts. Gross margin on user license
fees is substantially higher than gross margin on service revenue and porting
fees, reflecting the low materials, packaging and other costs of software
products compared with the relatively high personnel costs associated with
providing maintenance, technical support, consulting, training services and
development efforts. Cost of service revenue also varies based upon the mix of
maintenance, technical support, consulting and training services.
Cost of User License Fees. Cost of user license fees increased from $0.8
million for the three months ended June 30, 1997 to $3.1 million for the three
months ended June 30, 1998, and increased 204% from $1.7 million for the six
months ended June 30, 1997 to $5.1 million for the six months ended June 30,
1998. The increase is primarily the result of a larger percentage of license
fees being generated from the sale of products with higher royalty rates. Gross
margin on user license fees decreased from 96% for the three months and six
months ended June 30, 1997 to 92% and 93% for the three months and six months
ended June 30, 1998, respectively.
The gross margin on user license fees may vary from period to period based
on the license revenue mix and certain products having higher royalty rates than
other products. The Company may experience improvements in gross margins as
compared to the three and six months ended June 30, 1998 but does not expect
significant improvements in gross margin on user license fees.
Cost of Service Revenue. Cost of service revenue increased 155% from $1.6
million for the three months ended June 30, 1997 to $4.1 million for the three
months ended June 30, 1998, and increased 165% from $2.8 million for the six
months ended June 30, 1997 to $7.5 million for the six months ended June 30,
1998. Gross margin on service revenue decreased from 63% for the three months
ended June 30, 1997 to 56% for the three months ended June 30, 1998 and
decreased from 65% for the six months ended June 30, 1997 to 55% for the six
months ended June 30, 1998. This decrease in gross margin is primarily due to
personnel additions in
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both the Company's support organization to provide maintenance and other
services and in the Company's training and consulting organization in order to
expand the Company's existing infrastructure to deal with the increased demand
and the ability to deliver such services.
Cost of Porting Fees. Cost of porting fees decreased to $0.6 million for
the three months ended June 30, 1998, compared to $0.9 million for the same
period of 1997, and increased to $1.7 million for the six months ended June 30,
1998, compared to $1.6 million for the same period in 1997. Gross margin on
porting fees decreased from 38% for the three months ended June 30, 1997 to a
negative gross margin of 44% for the three months ended June 30, 1998 and
decreased from 43% for the six months ended June 30, 1997 to a negative 19% for
the six months ended June 30, 1998. The negative gross margin for the three and
six month periods ended June 30, 1998 resulted from the Company's devotion of
technical resources to funded porting activities in excess of the amounts
chargeable to the customer. From time to time, the Company incurs a negative
gross margin on porting fees due to the relatively high personnel costs
associated with such development efforts.
Operating Expenses
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, related benefits, commissions, consultant fees and other costs
associated with the Company's sales and marketing efforts. Selling and marketing
expenses increased 64% from $10.4 million for the three months ended June 30,
1997 to $16.9 million for the three months ended June 30, 1998, and increased
53% from $19.6 million for the six months ended June 30, 1997, to $30.0 million
for the six months ended June 30, 1998. Selling and marketing expenses as a
percentage of total net revenue decreased from 36% in both the three-month and
six-month periods ending June 30, 1997 to 35% and 34% in the three and six month
periods ending June 30, 1998, respectively. The increase in absolute dollars is
primarily attributable to increased sales and marketing staffing and, to a
lesser extent, increased costs associated with certain marketing programs. The
Company intends to continue to expand its global sales and marketing
infrastructure and accordingly, the Company expects its selling and marketing
expenses to increase in the future.
Research and Development. Research and development expenses consist
primarily of salaries, related benefits, third-party consultant fees and other
costs. Research and development expenses increased 37% from $6.5 million for the
three months ended June 30, 1997 to $8.9 million for the three months ended June
30, 1998, and increased 34% from $12.3 million for the six months ended June 30,
1997 to $16.5 million for the six months ended June 30, 1998. The increase was
due primarily to increased staffing levels. As a percentage of total net
revenue, research and development expenses decreased from 23% for the three
months ended June 30, 1997 to 19% for the three months ended June 30, 1998, and
decreased from 22% for the six months ended June 30, 1997 to 19% for the six
month period ended June 30, 1998. The Company believes that a significant level
of research and development investment is required to remain competitive and
expects such expenses will increase in future periods.
General and Administrative. General and administrative expenses consist
primarily of salaries, related benefits and fees for professional services, such
as legal and accounting services. General and administrative expenses increased
8% from $2.1 million for the three months ended June 30, 1997 to $2.2 million
for the three months ended June 30, 1998, and increased 5% from $4.2 million for
the six months ended June 30, 1997 to $4.4 million for the six months ended June
30, 1998. The increases in the three and six month periods was primarily due to
additional personnel costs and other expenses associated with the Company
enhancing its infrastructure to support expansion of its operations. General and
administrative expenses as a percentage of total net revenue decreased between
the three month periods from 7% to 5%, and decreased between the six month
periods from 8% to 5%. General and administrative expenses are expected to
increase in future periods to the extent the Company expands its operations..
In-Process Research and Development. On May 15, 1998 the Company acquired
all of the outstanding stock of Windward Technologies, Inc. ("Windward"), a
company that develops failure prediction software, for a total cost of $2.5
million. The transaction was accounted for using purchase accounting. Of the
total cost, $2.3 million was allocated to in-process research and development
and was expensed in the second quarter of
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1998 and $0.2 million was allocated to acquired intangibles which will be
amortized over a five year period. Total cash outflows in the second quarter of
1998 related to this purchase were $1.3 million. The Company has agreed to pay
the sole shareholder of Windward certain earn-out payments of up to an aggregate
of $1.2 million over the next two years subject to satisfaction of certain
conditions and has further agreed to pay such shareholder a royalty on certain
future product revenue derived from the products acquired over a five year
period, up to a maximum of $2.5 million. The Consolidated Statements of
Operations include the results of operations of Windward subsequent to the
acquisition date. For the three months and six months ended June 30, 1998 and
1997 the results of operations of Windward were not material to the Company.
Other Income, Net. Other income, net increased from $0.8 million for the
three months ended June 30, 1997 to $1.4 million for the three months ended June
30, 1998, and increased $1.0 million for the six months ended June 30, 1998 to
$2.7 million for the six months ended June 30, 1998. The increase was due
primarily to increased amounts of interest income attributable to the higher
level of funds available for investment, partially offset by increased amounts
of interest expense associated with the Company's long-term debt.
Provision for Income Taxes. The Company had an effective tax rate of 21%
and 32% for the six month periods ended June 30, 1998 and 1997, respectively.
The Company's effective tax rate is lower than the combined federal and state
statutory rates primarily due to the utilization of federal net operating loss
carry forwards, offset by the impact of non-deductible merger-related costs and
in-process research and development, as well as foreign taxes.
The Company accounts for its income taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under
SFAS 109, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amount of
assets and liabilities for financial reporting and the amounts used for income
taxes.. The realization of the Company's net deferred tax assets, which relate
primarily to net operating loss and tax credit carryforwards and temporary
differences, is dependent on generating sufficient taxable income in future
periods. Although realization is not assured, management believes it is more
likely than not that the net deferred tax asset will be realized. The amount of
the net deferred tax assets considered realizable, however, could be reduced or
increased in the near term if estimates of future taxable income are changed.
Management intends to evaluate the realizability of the net deferred tax assets
on a quarterly basis to assess the need for the valuation allowance.
New Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board issued Statement No. 130, "Reporting Comprehensive Income" (SFAS
130) and Statement No. 131, "Disclosures About Segments of An Enterprise and
Related Information" (SFAS 131). SFAS 130 established rules for reporting and
displaying comprehensive income. SFAS 131 will require the Company to use the
"management approach" in disclosing segment information. Both statements are
effective for the Company during fiscal 1998. The adoption of SFAS 130 or SFAS
131 did not have a material impact on the Company's results of operations, cash
flows or financial position in the three month and six month periods ended June
30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments totaled
$209.6 million at June 30, 1998 and represented 75% of total assets. Cash and
cash equivalents are highly liquid with original maturities of ninety days or
less. Short-term investments consist mainly of investment grade commercial
paper. At June 30, 1998, the Company had $100.8 million of long-term obligations
and stockholders' equity was approximately $128.5 million.
Net cash provided from operating activities was $23.2 and $2.5 million in
the six months ended June 30, 1998 and 1997, respectively. For the six months
ended June 30, 1998 and 1997 cash provided by operating activities resulted
primarily from net income and increases in accounts payable, accrued liabilities
and deferred revenue balances. These sources of cash were offset somewhat by
uses of cash in connection with an increase in balances of accounts receivable
and prepaid expenses.
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The Company's investing activities used cash of $20.5 million in the six
months ended June 30, 1998 primarily due to the net increase in short-term
investments of $9.2 million and capital expenditures of $10.0 million. In
addition the Company used $1.3 million of cash for the purchase of Windward in
May 1998. The Company's investing activities provided cash of $1.5 million in
the six months ended June 30, 1997 primarily due to the reduction of net
short-term investments of $4.8 million, partially offset by capital expenditures
of $3.4 million.
Financing activities provided cash of $6.9 million in the six months ended
June 30, 1998, arising primarily from the issuance of common stock under the
Company's employee stock plans. In the six months ended June 30, 1997, financing
activities provided cash of $1.6 million, which was also primarily due to the
issuance of stock under the Company's employee stock plans, partially offset by
the payments of notes payable.
In October 1997, the Company issued $100.0 million of 5.25% Convertible
Subordinated Notes due 2004 (the "Notes"), for which the Company received net
proceeds of $97.5 million. The Notes provide for semi-annual interest payments
each May 1 and November 1, commencing on May 1, 1998. The Notes are convertible
into shares of the Company's Common Stock at any time prior to the close of
business on the maturity date, unless previously redeemed or repurchased, at a
conversion price of $43.00 per share, subject to adjustment in certain events.
On or after November 5, 2002, the Notes will be redeemable over the period of
time until maturity at the option of the Company at declining premiums to par.
The debt issuance costs are being amortized over the term of the Notes using the
interest method. During the quarter the Company paid interest of $2.9 million
associated with this debt.
The Company believes that its current cash, cash equivalents and short-term
investment balances and cash flow from operations, if any, will be sufficient to
meet the Company's working capital and capital expenditure requirements for at
least the next twelve months. Thereafter, the Company may require additional
funds to support its working capital requirements or for other purposes and may
seek to raise such additional funds through public or private equity financing
or from other sources. There can be no assurance that additional financing will
be available at all or that if available, such financing will be obtainable on
terms favorable to the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Report on Form 10-Q, the following
factors should be considered carefully in evaluating the Company and its
business.
Fluctuating Operating Results. The Company's operating results have
fluctuated in the past, and may fluctuate significantly in the future depending
on a number of factors. Factors that have resulted in fluctuations in operating
results include: (i) the timing and level of sales by the Company's OEM
licensees of computer systems incorporating the Company's storage management
products; (ii) a significant increase in dependence upon non-OEM distribution
channels, which tend to be more unpredictable than OEM channels; (iii) timing of
revenue recognition related to source code license fees; (iv) achievement of
porting milestones; (v) expenditures related to investment in new products and
distribution channels, including the hiring of additional selling and marketing
personnel and outlay of promotional expenses; and (vi) the timing and extent of
sales and marketing organizations within OEM customers and resellers becoming
familiar with and endorsing the Company's products for resale.
In addition to the factors described above, factors that may contribute to
future fluctuations in quarterly operating results include, but are not limited
to: (i) development and introduction of new operating systems that require
additional development efforts; (ii) introduction or enhancement of products by
the Company or its competitors; (iii) changes in pricing policies of the Company
or its competitors; (iv) increased competition; (v) technological changes in
computer systems and environments; (vi) the ability of the Company to develop,
introduce and market new products in a timely manner including products for
Windows NT; (vii) quality control of products sold; (viii) market readiness to
deploy storage management products for distributed computing environments; (ix)
market acceptance of new products and product enhancements; (x) customer order
deferrals in anticipation of new products and product enhancements; (xi) the
Company's success in expanding its sales and marketing programs; (xii) personnel
changes; (xiii) foreign currency
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exchange rates; (xiv) mix of products sold; (xv) acquisition costs; (xvi) the
size and timing of orders; (xvii) seasonality of revenue; and (xviii) general
economic conditions.
The Company's operating results are highly sensitive to the timing of
larger orders. Orders typically range from a few thousand dollars to several
hundred thousand dollars. Revenue is difficult to forecast because the
client/server systems management software market is an emerging market that is
highly fragmented and subject to rapid change. The sale of the Company's
products also typically involves a significant technical evaluation and
commitment of capital and other resources, with the delays frequently associated
with customers' internal procedures, including delays to approve large capital
expenditures, to engineer deployment of new technologies within their networks,
and to test and accept new technologies that affect key operations. For these
and other reasons, the sales cycle associated with the Company's products is
typically lengthy, generally lasting three to nine months, is subject to a
number of significant risks, including customers' budgetary constraints and
internal acceptance reviews, that are beyond the Company's control, and varies
substantially from transaction to transaction. Because of the lengthy sales
cycle and the large size of certain transactions, if orders forecasted for a
specific transaction for a particular quarter are not realized in that quarter,
the Company's operating results for that quarter could be materially adversely
affected.
The Company's future revenue will continue to be difficult to predict, and
the Company has, in the past, failed to achieve its revenue expectations for
certain periods. Because the Company generally ships software products within a
short period after receipt of an order, it typically does not have a material
backlog of unfilled orders, and revenue in any quarter is substantially
dependent on orders booked and shipped in that quarter. In addition, the Company
typically recognizes a significant portion of its direct sales license revenue
in the last two weeks of a quarter. The Company's expense levels are based, in
part, on its expectations as to future revenue and to a large extent are fixed
in the short term. The Company will not be able to adjust expenses in the short
term to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall of revenue in relation to the Company's expectations or
any material delay of customer orders would have an immediate adverse effect on
its business, operating results and financial condition. As a result of all of
the foregoing factors, the Company believes that period-to-period comparisons of
the Company's results of operations are not and will not necessarily be
meaningful and should not be relied upon as any indication of future
performance. Furthermore, it is possible that in future quarters the Company's
operating results may not meet or exceed the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would be materially adversely affected.
Management of Growth; Dependence on Key Personnel. The Company
significantly increased in size as a result of the Merger, has continued to grow
since that time and expects to continue to experience periods of significant
growth in the future. The Company's agreements with key OEMs such as Sun
Microsystems, HP and Microsoft require the hiring of additional engineering,
sales and support personnel, and the commitment of significant staffing for the
performance of the Company's obligations under such agreements. Such growth is
likely to strain the Company's management control systems and resources
(including decision support, accounting, e-mail and management information
systems). With future growth, the Company will be required to continue to
improve its financial and management controls, reporting systems and procedures,
to expand, train and manage its employee work force and to secure additional
facilities when and if needed. There can be no assurance that the Company will
be able to manage such growth effectively. Any failure to do so could have a
material adverse effect on its business, operating results and financial
condition. Competition for qualified sales, technical and other personnel is
intense, and there can be no assurance that the Company will be able to attract,
assimilate or retain additional highly qualified employees in the future. If the
Company is unable to hire and retain such personnel, particularly those in key
positions, its business, operating results and financial condition would be
materially and adversely affected. The Company's future success also depends in
significant part upon the continued service of its key technical, sales and
senior management personnel. The loss of the services of one or more of these
key employees could have a material adverse effect on its business, operating
results and financial condition. Additions of new personnel and departures of
existing personnel, particularly in key positions, can be disruptive and can
result in departures of other existing personnel, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
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New Distribution Channels. A significant portion of the Company's net
revenues are derived from user license fees received from computer OEMs that
incorporate the Company's storage management software products into their
operating systems. The Company has no control over the shipping dates or volumes
of systems shipped by its OEM customers, and there can be no assurance that any
OEMs will ship operating systems incorporating the Company's products in the
future. Furthermore, the Company's license agreements with its OEM customers
generally do not require the OEMs to recommend or offer the Company's products
exclusively, have no minimum sales requirements and may be terminated by the
OEMs without cause.
The Company's strategic relationships with HP, Sun Microsystems and
Microsoft reflect a strategy for OEM product distribution involving the bundling
by OEMs of certain functional subsets or "lite" versions of the Company's
products with OEM computer systems or operating systems, cooperative direct
selling of full versions of such products by the Company and the OEMs, and the
direct sale by the Company of added value products to the OEM installed base of
customers. There can be no assurance that the Company will be able to deliver
its products to such OEMs in a timely manner despite the dedication of
significant engineering and other resources to the development of such products.
Any such failure could result in the Company having expended significant
resources with little or no return on its investment, which could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that this distribution strategy
will achieve the desired propagation of the Company's technology in the market
place, or result in sufficient revenues to the OEMs to induce them to actively
market the Company's products to their customers. This could have a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that the simultaneous sales efforts of such
OEMs and the Company will not create certain channel conflicts. Furthermore,
failure of the Company to timely develop and achieve market acceptance of new
products for sale to the OEM installed customer base could lead to a significant
loss of potential revenue to the Company.
In connection with the Company's agreement with Microsoft, there can be no
assurance that Microsoft will use the Company's products in any future version
of Windows NT, or that the Company will realize any expected benefits even if
such products are used in any future version of Windows NT. If the Company's
products are not available in a timely fashion, if Microsoft does not use these
products in Windows NT, or if the Company does not receive any benefits for the
use of its products in Windows NT, the Company's business, operating results and
financial condition could be materially adversely affected. If the release by
Microsoft of Windows NT 5.0 is significantly delayed, and/or the rate of
adoption of Windows NT 5.0 by users is slow, the Company will not be in a
position to market add-on products to the Windows NT installed customer base,
thereby resulting in possible delays in, or loss of, revenue to the Company.
Moreover, the Company would have lost certain opportunities as a result of the
diversion of resources to this agreement. Under this agreement, Microsoft is
also permitted to develop enhancements to and derivative products from the
Company's products that are embedded in certain Windows NT releases, and would
retain ownership of any such enhancements or derivative products. There can be
no assurance that Microsoft will not develop any such enhancements or derivative
products and, as a result, compete with the Company in this area.
In recent years, the Company has made significant investments in the
establishment of other distribution channels. Efforts by the Company in this
area include: (i) the introduction of shrink wrap packages of certain VERITAS
storage management software products for multiple platforms; (ii) the
distribution of end-user products for the Sun Microsystems' Solaris operating
system; (iii) the acquisition of Tidalwave Technologies, Inc. ("Tidalwave") in
April 1995, as a result of which the Company began distributing the VERITAS
FirstWatch end-user products; (iv) the Merger with OpenVision that provided the
Company an established and significant direct sales channel and (v) the
appointment of the Company as a reseller for certain products from Telebackup
Systems Inc. and St. Bernard Software.
As a result of the Merger, the Company's direct sales force is marketing
and selling the Company's products in competition with indirect sellers of its
products, such as OEMs and resellers, which could adversely affect the Company's
relations with such indirect sellers and result in such sellers being less
willing to market the Company's products aggressively. There can be no assurance
that such sales and marketing efforts by the Company's direct sales force will
not result in a decline in indirect sales as a result of actual or potential
competition between the Company's direct sales force and such indirect sellers,
or that such efforts
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will not have a material adverse effect on the Company's business, operating
results and financial condition. In addition, any such decline in indirect sales
may require the Company to accelerate investments for expansion into alternative
distribution channels, and no assurance can be given that the Company will have
sufficient resources to devote to such other channels.
Past and Future Acquisitions. The Company has made several acquisitions in
the past, including the Merger with OpenVision and the acquisition of Windward.
Acquisitions of companies, divisions of companies or products entail numerous
risks, including difficulty in successfully integrating and assimilating
acquired operations, diversion of management's attention and loss of key
employees of acquired companies. Difficulties can arise with respect to the
integration of product offerings and employees of acquired companies, including
conflicts that may arise with respect to distribution strategies, coordination
of geographically separated organizations, differences in corporate culture and
integration of personnel with disparate business backgrounds. The integration
and assimilation process can cause an interruption of, or a loss of momentum in,
the activities of the Company's business. Failure to accomplish the effective
integration of the Company's operations with those of an acquired company could
adversely affect the revenues and operating results of the Company. In the past
three years, the Company has made four acquisitions and two divestitures of
product lines; the Company may make additional acquisitions or effect additional
divestitures in the future. Products acquired by the Company in the past have
required significant additional development, such as restructuring software code
to support larger scale environments, porting products to additional operating
system platforms, regression testing and improving network and device support,
before they could be marketed and some failed to generate revenue for the
Company. No assurance can be given that the Company will not incur similar
problems in future acquisitions. Any such problems could have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, future acquisitions by the Company may result in dilutive issuance of
equity securities, the incurrence of additional debt, large one-time write-offs
and the creation of goodwill or other intangible assets that could result in
amortization expense. These factors could have a material adverse effect on the
Company's business, operating results and financial condition.
Increasing Product Concentration; Dependence on Growth of Storage
Management Software Market. A substantial majority of the Company's revenues
have been, and in future periods will be, derived from storage management
products. Storage management products accounted for 94% and 88% of the Company's
license revenue in the three months ended June 30, 1998 and 1997, and 94% and
89% for the six months ended June 30, 1998 and 1997, respectively. The Company
expects that storage management products will continue to account for a
substantial majority of the Company's revenues in future periods as a result of
its strategic decision to devote greater financial and other resources to
selling, servicing and supporting its storage management products. The
allocation of greater levels of sales, service and support resources to such
products could adversely affect the Company's ability to continue enhancing and
supporting its other product lines. Any failure by the Company to enhance and
support its other product lines could result in adverse customer reactions and
the loss of an existing revenue base, and could have a material adverse effect
on the Company's business, operating results and financial condition.
The Company's future financial performance will depend in large part on
continued growth in the number of companies adopting storage management
solutions for their client/server computing environments. There can be no
assurance that the market for storage management software and services will
continue to grow. If the storage management software and services market fails
to grow or grows more slowly than the Company currently anticipates, or in the
event of a decline in unit price or demand for the Company's storage management
products, as a result of competition, technological change or other factors, the
Company's business, operating results and financial condition would be
materially and adversely affected. The Company's financial performance may, in
the future, experience substantial fluctuations as a consequence of such
industry patterns, general economic conditions affecting the timing of orders,
and other factors affecting capital spending. There can be no assurance that
such factors will not have a material adverse effect on the Company's business,
operating results and financial condition.
Inability to Integrate Current and Future Products and
Technologies. Following the Merger, the Company commenced integration of
selected products and technologies to enhance storage management functionality
and the integration of products throughout its entire product line through the
availability of
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common services. The Company's success is dependent in significant part on the
Company's ability to integrate its products as planned and the resultant
products achieving market acceptance by end users, resellers and OEMs. No
assurance can be given that the Company will successfully integrate its products
as planned. If the Company is unable to develop and introduce new integrated
products and technologies, or enhancements to existing products, in a timely
manner, its business, operating results and financial condition would be
materially and adversely affected.
Uncertainty in Porting Products to New Operating Systems and Expansion into
Windows NT Market. Certain of the Company's products operate primarily on
certain versions of the UNIX operating system. Product development activities
are being directed towards developing new products for the UNIX operating
system, developing enhancements to the Company's current products and porting
new products and enhancements to other versions of the UNIX operating system.
The Company has also made and intends to continue to make substantial
investments in porting its products to new operating systems, including Windows
NT, and the Company's future success will depend on its ability to successfully
accomplish such ports. In addition, the Company's Windows NT product development
efforts may be dependent on product development funding received from third
parties. If such funding is delayed or not ultimately received, the Company's
Windows NT development efforts could be delayed, which could adversely affect
the Company's business, operating results and financial condition.
The process of porting existing products and product enhancements to, and
developing new products for, new operating systems requires substantial capital
investment, the devotion of substantial employee resources and the cooperation
of the owners of the operating systems to which the products are being ported or
developed. For example, the added focus on porting and development work for the
Windows NT market has required, and will require, the Company to hire additional
personnel with expertise in the Windows NT environment and to devote its
engineering resources to these projects. The diversion of engineering personnel
to this area may cause delays in other product development efforts of the
Company. Furthermore, operating system owners have no obligation to assist in
these porting or development efforts, and may instead choose to enter into
agreements with other third-party software developers or internally develop
their own products. In particular, the failure to receive a source code license
to certain portions of the operating system, either from the operating system
owner or a licensee thereof, would prevent the Company from porting its products
to or developing products for such operating system. There can be no assurance
that the Company's current or future porting efforts will be successful or, even
if successful, that the operating system to which the Company elects to port, or
for which it elects to develop products, will achieve or maintain market
acceptance. The failure of the Company to port its products to new operating
systems or to select those operating systems that achieve and maintain market
acceptance could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company's agreement with Microsoft requires the Company to develop a
functional subset of the VERITAS Volume Manager product to be ported to and
embedded in Windows NT. The agreement also requires the Company to develop a
disk management graphical user interface designed specifically for Windows NT.
Microsoft is obligated to fund a significant portion of the development expenses
for this product. The Company is currently recognizing revenue under the
development contract with Microsoft on a percentage of completion basis
consistent with its policy for revenue recognition for other similar agreements.
The payment terms in the Microsoft agreement do not directly correlate to the
timing of development efforts and therefore revenue of $1.0 million has been
recognized in advance of contract billings as of June 30, 1998. The failure of
the Company to complete the product in sufficient time for inclusion in Windows
NT 5.0 may result in a significant delay of the product being embedded in
Windows NT, and could ultimately result in Microsoft electing to omit the
Company's product from Windows NT altogether, which could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the Microsoft relationship will require the Company's
marketing and sales departments to deal in higher volume markets and will
require the Company to service the growing needs of the Windows NT channel and
customer base. The Company's experience in these higher volume markets is
limited.
Risk of Software Defects; Product Liability. Software products as complex
as those to be offered by the Company frequently contain errors or defects,
especially when first introduced or when new versions or
19
<PAGE> 20
enhancements are released. Despite product testing, the Company has in the past
released products with defects, discovered software errors in certain of its new
products after introduction and experienced delayed or lost revenue during the
period required to correct these errors. The Company has regularly introduced,
and the Company intends to continue to introduce, new products and enhancements
to existing products. Despite testing by the Company and by current and
potential customers, there can be no assurance that defects and errors will not
be found in existing products or in new products, versions or enhancements after
commencement of commercial shipments. Any such defects and errors could result
in adverse customer reactions, negative publicity regarding the Company and its
products, harm to the Company's reputation, loss of or delay in market
acceptance or require expensive product changes, any of which could have a
material adverse effect upon the Company's business, operating results and
financial condition.
The Company derives a significant amount of revenue from products licensed
pursuant to "shrink wrap" licenses that are not signed by licensees and,
therefore, may be unenforceable under the laws of certain jurisdictions. The
Company's products are generally used to manage data critical to organizations,
and, as a result, the sale and support of products by the Company may entail the
risk of product liability claims. Although the Company maintains errors and
omissions product liability insurance, such insurance may not adequately
compensate the Company for losses relating to such claims and a successful
liability claim brought against the Company could have a material adverse effect
upon the Company's business, operating results and financial condition.
Intense Competition. The markets in which the Company competes are
intensely competitive and rapidly changing. The Company's principal competition
in the storage management market consists of internal development groups of
current and prospective OEM customers, which have the resources and capability
to develop their own storage management solutions. Among the OEMs which have
included storage management capabilities in their operating systems are Sun
Microsystems for its Solaris system, DEC for its Digital UNIX system, HP for its
HP-UX system and Microsoft for Windows NT. The Company also encounters
competition from other third party software vendors and hardware companies
offering products that incorporate certain of the features provided by the
Company's products, and from disk controller and disk subsystem manufacturers
which have included or may include similar features.
As a result of the Merger and the associated higher visibility of the
Company in certain markets, the Company faces new competitors and new
competitive factors. In particular, the Company's new competitors include: (i)
hardware and software vendors that offer a management platform or framework to
support vendor-created and third-party systems management applications; (ii)
vendors that provide systems management software for the mainframe environment
who are migrating their products to the client/server environment; (iii) vendors
that provide "point" products that address specific problems and offer specific
functionality; and (iv) vendors that provide integrated and interoperable
solutions. Specific competitors that the Company has encountered or expects to
encounter as competitors include the Cheyenne division of Computer Associates
International, Inc. ("Computer Associates"), the ADSTAR Distributed Storage
Manager division of International Business Machines Corporation ("IBM"), Legato
Systems, Inc. and EMC Corporation. Many such competitors have substantially
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition and a larger installed customer base, than the Company.
The Company expects that the market for storage management software, which
historically has been large and fragmented, will become more consolidated with
larger companies being better positioned to compete in such environment in the
long term. As the open systems management software market develops, a number of
companies with greater resources than the Company could attempt to increase
their presence in this market by acquiring or forming strategic alliances with
competitors or business partners of the Company. For example, in 1996 IBM
purchased Tivoli Systems Inc. and Computer Associates purchased Cheyenne
Software; both Tivoli and Cheyenne are competitors of the Company.
The Company's success will depend significantly on its ability to adapt to
these new competing forces, to develop more advanced products more rapidly and
less expensively than its competitors, and to educate potential customers as to
the benefits of licensing the Company's products rather than developing their
own products. The Company's future and existing competitors could introduce
products with superior features, scalability and functionality at lower prices
than the Company's products and could also bundle existing or
20
<PAGE> 21
new products with other more established products in order to compete with the
Company. In addition, because there are relatively low barriers of entry for the
software market, the Company expects additional competition from other
established and emerging companies. Increased competition is likely to result in
price reductions, reduced gross margins and loss of market share, any of which
could materially and adversely affect the Company's business, operating results
and financial condition. There can be no assurance that the Company will be able
to compete successfully against current and future competitors, and the failure
to do so would result in the Company's business, operating results and financial
condition being materially and adversely affected.
Rapid Technological Change and Requirement for Frequent Product
Transitions. The market for the Company's products is intensely competitive,
highly fragmented and characterized by rapid technological developments,
evolving industry standards and rapid changes in customer requirements. The
introduction of products embodying new technologies, the emergence of new
industry standards or changes in customer requirements could render the
Company's existing products obsolete and unmarketable. As a result, the
Company's success depends upon its ability to continue to enhance existing
products, respond to changing customer requirements and develop and introduce in
a timely manner new products that achieve market acceptance and keep pace with
technological developments and emerging industry standards. Customer
requirements include, but are not limited to, product operability and support
across distributed and changing heterogeneous hardware platforms, operating
systems, relational databases and networks. For example, as the Company's
customers start to utilize Windows NT or other emerging operating platforms, it
will become necessary for the Company to enhance its products to operate on such
platforms in order to meet these customers' requirements. There can be no
assurance that the Company's products will achieve market acceptance or will
adequately address the changing needs of the marketplace or that the Company
will be successful in developing and marketing enhancements to its existing
products, or new products incorporating new technology, on a timely basis. The
Company has in the past experienced delays in product development, and there can
be no assurance that the Company will not experience further delays in
connection with its current product development or future development
activities. There can be no assurance that the Company will have the resources
necessary to perform its obligations under its development agreements in a
timely and efficient manner or that its development efforts will be successful.
If the Company is unable to develop and introduce new products or enhancements
to existing products in a timely manner in response to changing market
conditions or customer requirements, the Company's business, operating results
and financial condition will be materially and adversely affected. Because the
Company has limited resources, it must restrict its product development efforts
to a relatively small number of products and operating systems. There can be no
assurance that these efforts will be successful or, even if successful, that any
resulting product or operating system will achieve market acceptance.
Dependence on Proprietary Technology; Risks of Infringement. The Company's
success depends upon its proprietary technology. The Company relies on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and licensing arrangements to establish and protect its proprietary
rights. The Company presently has no patents although it has filed several
patent applications. As part of its confidentiality procedures, the Company
generally enters into non-disclosure agreements with its employees, distributors
and corporate partners, and license agreements with respect to its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. Policing unauthorized use of the Company's products is
difficult and although the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. In selling its products, the Company relies in part on
"shrink wrap" licenses that are not signed by licensees and, therefore, may be
unenforceable under the laws of certain jurisdictions. In addition, effective
protection of intellectual property rights is unavailable or limited in certain
foreign countries. There can be no assurance that the Company's protection of
its proprietary rights, including any patent that may be issued, will be
adequate or that the Company's competitors will not independently develop
similar technology, duplicate the Company's products or design around any
patents issued to the Company or its other intellectual property rights.
21
<PAGE> 22
The Company is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim such infringement by the Company with respect to current or
future products. The Company expects that software product developers will
increasingly be subject to such claims as the number of products and competitors
in the Company's industry segment grows and the functionality of products in the
industry segment overlaps. Any such claims, with or without merit, could result
in costly litigation that could absorb significant management time, which could
have a material adverse effect on the Company's business, operating results and
financial condition. Such claims might require the Company to enter into royalty
or license agreements. Such royalty or license agreements, if required, may not
be available on terms acceptable to the Company or at all, which could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Risks Associated With International Operations. International revenue (from
sales outside the United States and Canada) accounted for 21% of the Company's
total revenues for the three and six month periods ended June 30, 1998 and 21%
and 22% for the three and six month periods ending June 30, 1997. The Company
believes that its future success depends upon continued expansion of its
international operations. The Company currently has sales and service offices in
the United States, Canada, Japan, the United Kingdom, Germany, France, Sweden
and the Netherlands and has a product development group in India. The Company
also has resellers in North America, Europe, Asia Pacific, South America and the
Middle East. International expansion may require the Company to establish
additional foreign offices, hire additional personnel and recruit additional
international resellers. This may require significant management attention and
financial resources and could adversely affect the Company's operating margins.
To the extent the Company is unable to effect these additions efficiently and in
a timely manner, its growth, if any, in international sales will be limited, and
its business, operating results and financial condition could be materially and
adversely affected. There can be no assurance that the Company will be able to
maintain or increase international market demand for its products.
As of June 30, 1998, the Company had 46 engineers employed by its
subsidiary located in Pune, India, who perform certain product development work.
These international operations subject the Company to a number of risks inherent
in developing products outside of the United States, including the potential
loss of developed technology, imposition of governmental controls, export
license requirements, restrictions on the export of critical technology,
political and economic instability, trade restrictions, difficulties in managing
international operations and lower levels of intellectual property protection.
Furthermore, if the Company were required to discontinue its product development
efforts in India, it would incur significantly higher operating expenses as a
result of having to perform such development work in the United States.
From time to time, the Company may engage in exchange rate hedging
activities. Such activities have been insignificant to date. There can be no
assurance that any hedging techniques implemented by the Company will be
successful.
The Company's international business also involves a number of additional
risks, including lack of acceptance of localized products, cultural differences
in the conduct of business, longer accounts receivable payment cycles, greater
difficulty in accounts receivable collection, seasonality due to the slow-down
in European business activity during the Company's third fiscal quarter,
unexpected changes in regulatory requirements and royalty and withholding taxes
that restrict the repatriation of earnings, tariffs and other trade barriers,
and the burden of complying with a wide variety of foreign laws. The Company's
international sales are generated primarily through its international sales
subsidiaries and are denominated in local currency, creating a risk of foreign
currency translation gains and losses. To the extent profit is generated or
losses are incurred in foreign countries, the Company's effective income tax
rate may be materially and adversely affected. In some markets, localization of
the Company's products is essential to achieve market penetration. The Company
may incur substantial costs and experience delays in localizing its products,
and there can be no assurance that any localized product will ever generate
significant revenue. There can be no assurance that any of the factors described
herein will not have a material adverse effect on the Company's future
international sales and operations and, consequently, its business, operating
results and financial condition.
22
<PAGE> 23
Year 2000 Compliance. The Company is aware of the issues associated with
the programming code in existing computer systems as the millennium ("Year
2000") approaches. The Year 2000 problem is pervasive and complex as virtually
every computer operation will be affected in some way by the rollover of the two
digit year value to 00. Systems that do not properly recognize date sensitive
information when the year changes to 2000 could generate erroneous data or cause
a system to fail. Significant uncertainty exists in the software industry
concerning the potential effects associated with such compliance. The Company
has tested its existing products and believes that it has identified, corrected
and reprogrammed them to be Year 2000 compliant, and new products are being
designed to be Year 2000 compliant. Although the Company's products have
undergone, or will undergo, the Company's normal quality testing procedures,
there can, however, be no assurance that the Company's products will contain all
necessary date code changes. Furthermore, use of the Company's products in
connection with other products which are not Year 2000 compliant, including
non-compliant hardware, software and firmware, may result in the inaccurate
exchange of date data resulting in performance issues or system failure. Any
failure of the Company's products to perform, including system malfunctions due
to the onset of the calendar year 2000, could result in claims against the
Company, which could have a material adverse effect on the Company's business,
financial condition or results of operations. Moreover, the Company's customers
could choose to convert to other calendar year 2000 compliant products or to
develop their own products in order to avoid such malfunctions, which could have
a material adverse effect on the Company's business, financial condition or
results of operations. In addition, the Company believes that purchasing
patterns of customers and potential customers of the Company may be affected by
Year 2000 compliance issues as organizations expend significant resources to
correct or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds being available to such entities for
other information technology purchases such as those products offered by the
Company. Any such deferral of purchases by the Company's customers or potential
customers could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company is also currently in the process of evaluating its information
technology infrastructure for Year 2000 compliance. In the event that any of the
Company's significant suppliers or customers does not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
adversely affected. This could result in system failures or generation of
erroneous information and could cause significant disruption to business
activities. The Company is reviewing what actions are required to make all
software systems used internally Year 2000 compliant as well as actions needed
to mitigate vulnerability to problems with suppliers and other third parties'
systems. Such actions include a review of vendor contracts and formal
communication with suppliers to request certification that products are Year
2000 compliant. The Company is assessing the extent of the necessary
modifications to its computer software, and management does not anticipate that
the Company will incur significant operating expenses or be required to invest
heavily in computer system improvements to be Year 2000 compliant. There can,
however, be no assurance that such measures will alleviate the Year 2000
problems which could have a material adverse effect upon the Company's business,
operating results and financial condition.
Significant Leverage; Debt Service. In connection with the sale of 5.25%
Convertible Subordinated Notes due 2004 (the "Notes"), the Company incurred $100
million aggregate principal amount of indebtedness which resulted in a ratio of
long-term debt to total capitalization at June 30, 1998 of approximately 44.0%.
As a result of this additional indebtedness, the Company's principal and
interest payment obligations will increase substantially. The degree to which
the Company will be leveraged could materially and adversely affect the
Company's ability to obtain financing for working capital, acquisitions or other
purposes and could make it more vulnerable to industry downturns and competitive
pressures. The Company's ability to meet its debt service obligations will be
dependent upon the Company's future performance, which will be subject to
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control.
The Company will require substantial amounts of cash to fund scheduled
payments of principal and interest on its indebtedness, including the Notes,
future capital expenditures and any increased working capital requirements. If
the Company is unable to meet its cash requirements out of cash flow from
operations, there
23
<PAGE> 24
can be no assurance that it will be able to obtain alternative financing. In the
absence of such financing, the Company's ability to respond to changing business
and economic conditions, to make future acquisitions, to absorb adverse
operating results or to fund capital expenditures or increased working capital
requirements may be adversely affected. If the Company does not generate
sufficient increases in cash flow from operations to repay the Notes at
maturity, it could attempt to refinance the Notes; however, no assurance can be
given that such a refinancing would be available on terms acceptable to the
Company, if at all. Any failure by the Company to satisfy its obligations with
respect to the Notes at maturity (with respect to payments of principal) or
prior thereto (with respect to payments of interest or required repurchases)
would constitute a default under the Indenture and could cause a default under
agreements governing other indebtedness, if any, of the Company.
Volatility of Stock Price. The market price for the Company's Common Stock
is highly volatile. The trading price of the Company's Common Stock could be
subject to wide fluctuations in response to quarterly variations in operating
and financial results, announcements of technological innovations, new products,
acquisitions or dispositions, new customer relationships or new strategic
relationships by the Company or its competitors, changes in prices of the
Company's or its competitors' products and services, changes in product mix, or
changes in revenue and revenue growth rates for the Company. Statements or
changes in opinions, ratings, or earnings estimates made by brokerage firms or
industry analysts relating to the markets in which the Company does business, or
relating to the Company specifically, have resulted, and could in the future
result, in an immediate and adverse effect on the market price of the Company's
Common Stock. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations, which have particularly affected the
market price for the securities of many high-technology companies and that often
have been unrelated or disproportionate to the operating performance of these
companies. These fluctuations, as well as general economic, market and political
conditions such as recessions or military conflicts, may adversely affect the
market price of the Company's Common Stock.
24
<PAGE> 25
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on April 23, 1998 (the
"Annual Meeting"), the following individuals were elected to the Board of
Directors:
<TABLE>
<CAPTION>
VOTES IN FAVOR VOTES WITHHELD
-------------- --------------
<S> <C> <C>
Mark Leslie................................ 27,326,643 53,735
Joeseph Rizzi.............................. 27,315,695 64,683
Geoffrey W. Squire......................... 27,315,295 65,083
William H. Janeway......................... 27,315,695 64,683
Fred van den Bosch......................... 27,328,143 52,235
Steven Brooks.............................. 27,328,143 52,235
Roel Pieper................................ 21,081,087 6,299,291
</TABLE>
The following proposal was also approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE BROKER
VOTES VOTES ABSTENTIONS NON-VOTES
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
1. Ratification of the appointment of Ernst & Young
LLP as auditors for the fiscal year ending December
31, 1998........................................... 27,373,167 3,949 3,262 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibit is filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule (EDGAR only)
</TABLE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended June 30, 1998.
25
<PAGE> 26
SIGNATURE
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, on August 12, 1998.
VERITAS SOFTWARE CORPORATION
/s/ KENNETH E. LONCHAR
--------------------------------------
Kenneth E. Lonchar
Vice President, Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
26
<PAGE> 27
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE PERIOD
ENDED JUNE 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 85,266
<SECURITIES> 124,367
<RECEIVABLES> 37,706
<ALLOWANCES> 1,760
<INVENTORY> 0
<CURRENT-ASSETS> 253,998
<PP&E> 32,826
<DEPRECIATION> 15,357
<TOTAL-ASSETS> 278,382
<CURRENT-LIABILITIES> 49,031
<BONDS> 100,000
0
0
<COMMON> 192,743
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 278,382
<SALES> 38,337
<TOTAL-REVENUES> 48,113
<CGS> 3,130
<TOTAL-COSTS> 38,312
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,429
<INCOME-PRETAX> 11,239
<INCOME-TAX> 2,698
<INCOME-CONTINUING> 8,541
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,541
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.17
</TABLE>
