-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sym1iQPiwQmjjOjAe+Z98+70QQNrdhmXq1f+GrlbsEt66FqiqTLfv4UUOr3LjbCO ZWX1krykSTPTEPHyylOTMw== 0000950129-97-003377.txt : 19970815 0000950129-97-003377.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950129-97-003377 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BMC SOFTWARE INC CENTRAL INDEX KEY: 0000835729 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 742126120 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17136 FILM NUMBER: 97663928 BUSINESS ADDRESS: STREET 1: 2101 CITYWEST BLVD CITY: HOUSTON STATE: TX ZIP: 77042-2827 BUSINESS PHONE: 7139188800 MAIL ADDRESS: STREET 1: 2101 CITYWEST BLVD CITY: HOUSTON STATE: TX ZIP: 77042-2827 10-Q 1 BMC SOFTWARE INC. - 6/30/1997 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ________________ Commission file number 0-17136 BMC SOFTWARE, INC. (Exact name of registrant as specified in its charter) Delaware 74-2126120 (State or other jurisdiction of (IRS Employer identification No.) incorporation or organization) BMC Software, Inc. 2101 CityWest Boulevard Houston, Texas 77042 (Address of principal executive officer) (Zip Code)
Registrant's telephone number including area code: (713)918-8800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 8, 1997, there were outstanding 101,639,277 shares of Common Stock, par value $.01, of the registrant. 2 BMC SOFTWARE, INC. AND SUBSIDIARIES Quarter Ended June 30, 1997 INDEX
Page ---- PART I. FINANCIAL INFORMATION --------------------- Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets June 30, 1997 (Unaudited) and March 31, 1997 3 Condensed Consolidated Statements of Earnings Three months ended June 30, 1997 and 1996 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows Three months ended June 30, 1997 and 1996 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 8 PART II. OTHER INFORMATION ----------------- Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 ----------
2 3 Part I. FINANCIAL INFORMATION Item 1. Financial Statements BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
June 30, March 31, ASSETS 1997 1997 ---------- --------- (Unaudited) Current assets: Cash and cash equivalents $100,346 $ 79,794 Investment securities 57,984 59,159 Receivables: Trade 76,590 87,576 Interest and other 11,451 11,247 -------- -------- Total receivables 88,041 98,823 Prepaid expenses and other 10,041 10,606 -------- -------- Total current assets 256,412 248,382 -------- -------- Property and equipment, net 125,285 116,296 Software development costs, net 44,271 39,486 Purchased software, net 35,932 19,735 Finance receivables 4,621 4,397 Investment securities 411,114 402,742 Deferred charges and other assets 9,875 13,121 -------- -------- $887,510 $844,159 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 4 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (continued)
June 30, March 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997 ----------- --------- (Unaudited) Current liabilities: Trade accounts payable $ 6,686 $ 9,439 Accrued liabilities and other 78,690 50,025 Current portion of deferred revenue 155,053 145,199 -------- -------- Total current liabilities 240,429 204,663 -------- -------- Deferred revenue and other 94,095 93,284 -------- -------- Total liabilities 334,524 297,947 -------- -------- Stockholders' equity: Common stock 1,050 1,050 Additional paid-in capital 89,632 82,391 Retained earnings 554,559 565,122 Foreign currency translation adjustment (639) (820) Unrealized gain (loss) on securities available for sale 1,592 (750) -------- -------- 646,194 646,993 Less treasury stock 89,002 96,901 Less unearned portion of restricted stock compensation 4,206 3,880 -------- -------- Total stockholders' equity 552,986 546,212 -------- -------- $887,510 $844,159 ======== ========
See accompanying notes to condensed consolidated financial statements. 4 5 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except per share data) (Unaudited)
Three Months Ended June 30, 1997 1996 -------- -------- Revenues: Licenses $107,746 $ 82,630 Maintenance 50,668 43,420 -------- -------- Total revenues 158,414 126,050 -------- -------- Operating expenses: Selling and marketing 47,401 37,526 Research and development 20,769 17,859 Cost of maintenance services and product licenses 17,515 14,014 General and administrative 11,189 10,595 Acquired research and development costs 60,272 11,259 -------- -------- Total operating expenses 157,146 91,253 -------- -------- Operating income 1,268 34,797 Other income 6,148 4,294 -------- -------- Earnings before taxes 7,416 39,091 Income taxes 17,979 11,919 -------- -------- Net earnings (loss) $(10,563) $ 27,172 ======== ======== Earnings (loss) per share $ (.10) $ 0.26 ======== ======== Shares used in computing earnings (loss) per share 108,083 106,238 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 6 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Three Months Ended June 30, 1997 1996 -------- -------- Cash flows from operating activities: Net earnings (loss) $(10,563) $ 27,172 Adjustments to reconcile net earnings to net cash provided by operating activities: Acquired research and development costs 60,272 11,259 Depreciation and amortization 11,585 8,582 Net change in receivables, payables and other items 26,274 14,216 -------- -------- Total adjustments 98,131 34,057 -------- -------- Net cash provided by operating activities 87,568 61,229 -------- -------- Cash flows from investing activities: Technology acquisitions, net of cash acquired (51,187) (13,580) Purchased software and related assets (947) (190) Capital expenditures (12,608) (5,269) Capitalization of software development (9,278) (5,910) Purchases of securities held to maturity (14,498) (60,783) Proceeds from securities held to maturity 9,643 25,415 (Increase) decrease in long-term finance receivables (224) (30,122) -------- -------- Net cash used in investing activities (79,099) (90,439) -------- -------- Cash flows from financing activities: Income tax reduction relating to stock options 6,227 -- Stock options exercised and other 6,607 5,648 Treasury stock acquired (933) (880) -------- -------- Net cash used in financing activities 11,901 4,768 -------- -------- Effect of exchange rate changes on cash 182 (71) -------- -------- Net change in cash and cash equivalents 20,552 (24,513) Cash and cash equivalents at beginning of period $ 79,794 62,128 -------- -------- Cash and cash equivalents at end of period $100,346 $ 37,615 ======== ======== Supplemental disclosure of cash flow information: Cash paid for Income taxes $ 2,489 $ 16,433
See accompanying notes to condensed consolidated financial statements. 6 7 BMC SOFTWARE, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Note 1 - Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of BMC Software, Inc. and its wholly owned subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the Company's annual audited financial statements for the year ended March 31, 1997, as filed with the Securities and Exchange Commission on Form 10-K. Note 2 - Earnings (Loss) Per Share Earnings (loss) per share is based on the weighted average number of common shares and common stock equivalents outstanding for the period. For purposes of this calculation, outstanding stock options and unearned restricted stock shares are considered common stock equivalents using the treasury stock method. Fully diluted earnings (loss) per share is the same as, or not materially different from, primary earnings per share and, accordingly, is not presented. Note 3 - Technology Acquisitions During the quarter ended June 30, 1997, the Company completed two acquisitions which included DataTools, Inc. and another technology company for an aggregate purchase price of approximately $80,700,000, including direct acquisition costs. The Company funded these acquisitions primarily with cash and to a lesser extent through the issuance of stock options in its common stock. The Company accounted for these transactions using the purchase method and recorded a $57,267,000 charge, net of a $3,005,000 income tax benefit, for acquired research and development costs. As of June 30, 1997 approximately $18,335,000 of additional consideration and transaction costs relating to these acquisitions remained unpaid. 7 8 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition This discussion comprises historical information for the periods covered, followed by certain forward looking information and information about certain risks and uncertainties that could affect the Company's future operating results. This discussion should be read in conjunction with the attached consolidated financial statements and notes thereto and with the audited financial statements and notes thereto, and the Management's Discussion and Analysis of Results of Operation and Financial Condition, contained in the Company's Form 10-K for fiscal 1997. A. HISTORICAL INFORMATION RESULTS OF OPERATION The following table sets forth, for the periods indicated, the percentages that selected items in the Condensed Consolidated Statements of Earnings bear to total revenues. These comparisons of financial results are not necessarily indicative of future results.
Percentage of Total Revenues ---------------------------- Three Months Ended June 30, 1997 1996 ---- ---- Revenues: License 68.0% 65.6% Maintenance 32.0 34.4 ----- ----- Total revenues 100.0 100.0 Operating expenses: Selling and marketing 30.0 29.8 Research and development 13.1 14.2 Cost of maintenance services and product licenses 11.0 11.1 General and administrative 7.1 8.4 Acquired research and development costs 38.0 8.9 ----- ----- Operating income .8 27.6 Other income 3.9 3.4 ----- ----- Earnings before taxes 4.7 31.0 Income taxes 11.4 9.4 ----- ----- Net earnings (loss) (6.7)% 21.6% ===== =====
8 9 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) REVENUES
Three Months Ended June 30, -------- (in thousands) 1997 1996 Change -------- -------- ------ North American license revenues $ 75,200 $ 55,728 34.9% International license revenues 32,546 26,902 21.0% -------- -------- Total license revenues 107,746 82,630 30.4% Maintenance revenues 50,668 43,420 16.7% -------- -------- Total revenues $158,414 $126,050 25.7% ======== ========
License Revenues The Company's license revenues include product license fees, capacity-based license upgrade fees and restructuring fees. Product license fees are generated from the initial licensing of a product and subsequent licenses purchased under the Company's tier-based licensing program. Capacity-based license upgrade fees are charged when a customer acquires the right to run an already licensed product on additional processing capacity, which may be measured traditionally by central processing unit ("CPU") tier or by the aggregate processing capacity measured in millions of instructions per second ("MIPS") on which the Company's products are installed. These license upgrade fees include fees associated with currently installed additional processing capacity and fees associated with anticipated future processing capacity. Restructuring fees are charges used to increase the discounts used to calculate future maintenance and upgrade charges for a customer's installed products. The Company's North American operations generated 67% of total license revenues in the quarter ended June 30, 1996 and 70% for the corresponding quarter ended June 30, 1997. The 35% increase in North American license revenues is primarily attributable to increased capacity-based upgrade fees for both current and future capacity. Capacity-based upgrade fees for future capacity represented the single largest component of North American license revenues for the quarter ended June 30, 1997. International license revenues represented 33% and 30% of total license revenues for the quarters ended June 30, 1996 and 1997, respectively. International license revenue growth from the first quarter of fiscal 1997 to fiscal 1998 was derived principally from capacity-based upgrade fees associated with current capacity and from new license sales of the Company's client/server products. Capacity-based upgrade fees include fees for both current and future additional processing capacity. These fees accounted for 23% and 35% of total revenues in the first quarter of fiscal 1997 and 1998, respectively. The sustainability and growth of the Company's mainframe-based license revenues are dependent upon these capacity-based upgrade fees, particularly within its largest customer accounts. Most of the Company's largest customers have entered into enterprise license 9 10 Management's Discussion and Analysis of BMC SOFTWARE, INC. AND SUBSIDIARIES Results of Operations and Financial Condition (continued) agreements allowing them to install the Company's products on an unspecified number of CPUs, subject to a maximum limit on the aggregate power of the CPUs as measured in MIPS. Substantially all of these transactions include upgrade charges associated with additional processing capacity beyond the customer's current usage level and/or a restructuring fee, and some include license fees for additional products. In the quarters ended June 30, 1996 and 1997, the enterprise license fees for future additional processing capacity and license restructurings comprised approximately 22% and 26% of total revenues, respectively. The fees associated with future additional mainframe processing capacity typically comprise from one-half to substantially all of the license fees included in the enterprise license transaction. Over the past two fiscal years, the Company has experienced a marked increase in demand from its largest customers for current and anticipated mainframe processing capacity, and the Company expects that it will continue to be dependent upon these license revenue components. With the rapid advancement of client/server technology and customers' needs for more functional and open applications to replace legacy systems, however, there can be no assurance that the demand for mainframe processing capacity will continue at current levels. Should this trend slow dramatically or reverse, it would adversely impact the Company's mainframe-based license revenues and operating results. Maintenance and Support Revenues Maintenance and support revenues represent the ratable recognition of customers' prepaid fees entitling them to product enhancements, technical support services and ongoing compatibility with third-party operating systems, database management systems and applications. Maintenance and support charges are generally 15% to 20% of the list price of the product at the time of renewal, less any applicable discounts. Maintenance revenues also include the ratable recognition of the bundled fees for first-year maintenance services covered by the related perpetual license agreement. The Company continues to invest heavily in product maintenance and support and believes that maintaining its reputation for superior product support is a key component of its value pricing model. Maintenance revenues have increased over the last three fiscal years as a result of the continuing growth in the base of installed products and the processing capacity on which they run. Maintenance fees increase in proportion to the processing capacity on which the products are installed; consequently, the Company receives higher absolute maintenance fees as customers install its products on additional processing capacity. Due to increased discounting at higher levels of "future MIPS" licensing, however, the maintenance fees per MIPS are often reduced in enterprise license agreements. Historically, the Company has enjoyed high maintenance renewal rates for its mainframe-based products. Should customers migrate from their mainframe applications or find alternatives to the Company's products, however, increased cancellations could occur. This would adversely impact the sustainability and growth of the Company's maintenance revenues. To date, the Company has been successful in extending its traditional maintenance and support pricing model to the client/server market. At this time, there is insufficient historical data to determine whether customers will continue to accept this pricing model and renew their maintenance and support contracts at the levels experienced in the mainframe market. 10 11 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Product Line Revenues The Company's products for the IBM-compatible mainframe environment accounted for 87% and 84% of total revenues in the quarters ended June 30, 1997 and 1998. The database utilities and administrative tools for IBM's IMS DB and DB2 database management systems comprise the largest portion of the Company's mainframe-based and total revenues. These product lines accounted for 66% and 65% of total revenues in the first quarters of fiscal 1997 and 1998, respectively and 64% and 65% of license revenues for the same periods. Total revenues and license revenues from these product lines grew 25% and 33%, respectively in the first quarter of fiscal 1998. The Company's other products for the mainframe environment contributed 22% and 18% of total revenues and 19% and 15% of license revenues for the quarters ended June 30, 1997 and 1998, respectively. Both total and license revenues for the Company's other mainframe products in the fiscal 1998 first quarter grew by approximately 4% compared to the prior year's quarter. The Company's client/server product lines comprise the PATROL application and database management solutions, the PATROL DB database administration products and the Company's high-performance database backup and recovery solutions. In total, these product lines contributed 13% and 16% of total revenues for the quarters ended June 30, 1997 and 1998, respectively and 17% and 20% of license revenues for the same periods. Total revenues for these product lines grew 63% and license revenues grew 49% in the first quarter of fiscal 1998. EXPENSES
Three Months Ended June 30, -------- (in thousands) 1997 1996 Change -------- -------- ------ Selling and marketing expenses $ 47,401 $ 37,526 26.3% Research and development expenses 20,769 17,859 16.3% Cost of maintenance services and product licenses 17,515 14,014 25.0% General and administrative expenses 11,189 10,595 5.6% Acquired research and development 60,272 11,259 435.3% -------- ------- Total operating expenses $157,146 $91,253 72.2% ======== =======
11 12 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Selling and Marketing Expenses Selling and marketing expenses increased by 26% or $9,875,000 for the quarter ended June 30, 1997 as compared to the quarter ended June 30, 1996. The single largest contributor to this expense growth was personnel costs. Personnel costs increased as the result of a 48% increase in headcount from June 30, 1996 to June 30, 1997. Other contributors to the increase were severance pay for terminated sales personnel in Europe and travel expenses. As a percentage of total revenues, selling and marketing expenses remained constant at 30% in the first quarter of fiscal 1998 when compared to the first quarter of fiscal 1997. Research and Development Expenses Research and development expenses increased primarily due to the addition of permanent and contract personnel who were hired to develop new product offerings and, to a lesser extent, support existing products. Research and development headcount from June 30, 1996 increased by 30%. These increases have been offset by a 57% increase in software capitalization. For the first quarter of fiscal 1998, the Company capitalized $9,278,000 in software development costs. In the first quarter of fiscal 1997, the Company capitalized $5,910,000 in software development costs. Research and development expenses (which are net of the above-mentioned capitalized software development costs) as a percentage of total revenues have decreased slightly from 14% in the first quarter of fiscal 1997 to 13% in the first quarter of fiscal 1998. Over the last three fiscal years, the Company has supplemented its internal product development efforts with acquisitions of several companies and technologies, including the base technologies for the PATROL product lines. The Company's acquisition strategy in general has been to acquire emerging technologies, rather than established companies, and to significantly enhance, fortify, expand and integrate the acquired technology. See "-Acquired Research and Development Costs" below. Cost of Maintenance Services and Product Licenses Cost of maintenance services and product licenses expenses consist of amortization of purchased and internally developed software, costs associated with technical support operations and royalty fees. This expense line item has increased in the first quarter of fiscal 1998 primarily as a result of increases in technical support operations and amortization of internally developed software. Amortization for the Company's capitalized software totaled $4,493,000 and $3,192,000, including accelerated charges, in the first quarter of fiscal 1998 and 1997, respectively. The Company accelerated the amortization of some of its older products by approximately $2,900,000 and $2,009,000 during the first quarter of fiscal 1998 and 1997, respectively. These software products were not expected to generate sufficient future revenues which would be required for the Company to realize the carrying value of the assets. As a percentage of total revenues, these expenses remained constant at 11% in the first quarters of fiscal 1997 and 1998. 12 13 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) General and Administrative Expenses The Company's general and administrative expenses increased by $594,000, or 6%, in the first quarter of fiscal 1998 as compared to the first quarter of fiscal 1997. The increase is primarily related to personnel costs associated with a 4% increase in headcount. The growth in general and administrative expenses was offset by a decrease in bonuses paid to executives of the Company. As a percentage of total revenues, general and administrative expenses decreased to 7% in the first quarter of fiscal 1998 from 8% in the first quarter of fiscal 1997. Acquired Research and Development Costs During the first quarter of fiscal 1998, the Company completed the acquisitions of stock and assets (including in-process research and development) of certain technology companies for an aggregate purchase price of $80,700,000 million, including direct acquisition costs. The Company accounted for these transactions using the purchase method of accounting. During the quarter, the Company recorded a $60,272,000 charge ($57,267,000 net of income tax benefits), for acquired research and development costs. OTHER INCOME For the first quarter of fiscal 1998, other income was $6,148,000, reflecting an increase of 43% over $4,294,000 of other income in the same quarter of fiscal 1997. Other income consists primarily of interest earned on tax-exempt municipal securities, euro bonds, corporate bonds, mortgage securities and money market funds. The increase in other income is primarily due to an increase of approximately $226,000,000 in cash and investment securities from June 30, 1996 to June 30, 1997. INCOME TAXES For the first quarter of fiscal 1998, income tax expense was $17,979,000, compared to $11,919,000 for the same quarter in fiscal 1997. The Company's income tax expense represents the federal statutory rate of 35%, plus certain state taxes, reduced by the benefit from the Company's Foreign Sales Corporation, the effect of tax exempt interest earned from cash investments, the effect of tax deductions on certain technology acquisitions and foreign income taxes. Excluding the impact of technology acquisitions, the Company's effective income tax rate for the three months ended June 30, 1997 has decreased to 31% from 32% during the same period in fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its growth through funds generated from operations. As of June 30, 1997, the Company had cash, cash equivalents and investment securities of $569,444,000. The Company did not repurchase any shares on the open market during the first quarter of fiscal 1998. As of June 30, 1997, the Company has authorization from its Board of Directors, to acquire up to 4,877,300 shares of its common stock pursuant to the Company's stock repurchase program. 13 14 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) The Company believes that existing cash balances and funds generated from operations will be sufficient to meet its liquidity requirements for the foreseeable future. B. FORWARD LOOKING INFORMATION AND CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS. Management's Discussion and Analysis of Results of Operations and Financial Condition include certain forward looking statements, which are identified by the use of the words "believes," "expects" and similar expressions that contemplate future events. Numerous important factors, risks and uncertainties affect the Company's operating results and could cause the Company's actual results to differ materially from the results implied by these or any other forward looking statements made by, or on behalf of the Company. There can be no assurance that future results will meet expectations. These important factors, risks and uncertainties include, but are not limited to, those described in the following paragraphs and in the discussion in the Company's March 31, 1997 Annual Report under the heading "Business," including, without limitation, the discussion under the subheading "Competition, System Dependence." The Company's stock price has historically been highly volatile. Future revenues, earnings and stock prices may be subject to wide swings, particularly on a quarterly basis, in response to variations in operating and financial results, anticipated revenue and/or earnings growth rates and other factors. The stock price of software companies in general, and the Company in particular, is based on expectations of future revenue and earnings growth. Any failure to meet anticipated revenue and earnings levels in a period would likely have a significant adverse effect on the Company's stock price. The timing and amount of the Company's license revenues are subject to a number of factors that make estimation of operating results prior to the end of a quarter extremely uncertain. The Company generally operates with little or no sales backlog and, as a result, license revenues in any quarter are dependent upon contracts entered into or orders booked and shipped in that quarter. Most of the Company's sales are closed at the end of each quarter, and there has been and continues to be a trend toward larger enterprise license transactions, which can have sales cycles of up to a year or more and require approval by a customer's upper management. These transactions are typically difficult to manage and predict. Failure to close an expected individually significant transaction could cause the Company's revenues and earnings in a period to fall short of expectations. Other factors that may cause significant fluctuations in the Company's quarterly revenues include competition, industry or technological trends, customer budgetary decisions, mainframe processing capacity growth, general economic conditions or uncertainties, mainframe industry pricing and other trends, announcements of new hardware or software products and the timing of price increases. The Company generally does not know whether revenues and earnings will meet expected results until the final days or day of a quarter. The Company's operating expenses are to a large extent fixed in the short term so that the Company has very limited ability to adjust its planned expenses if revenues fail to meet expectations. 14 15 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) The Company's Operating Margins (exclusive of charges for acquired research and development costs) have ranged from 37% to 45% in recent quarters, which is at the high-end of the range for peer companies. The Company does not expect future margin expansion. Further, since research and development, sales, support and distribution costs for client/server software products are generally higher than for mainframe products, Operating Margins will experience more pressure as the mix of the Company's business continues its shift to client/server revenues. The Company is continuing to develop indirect channel relationships to increase its coverage and presence in a cost effective manner. There can be no assurance, however, that this strategy will be successful. If the Company's direct sales force remains the primary channel for its client/server products, its selling and marketing expenses could increase and Operating Margins could be reduced. The Company has historically realized greater revenues and net earnings in the latter half of its fiscal year; the quarter ending December 31 coincides with the end of customers' annual budgetary periods and the quarter ending March 31 coincides with the end of the Company's annual sales plans and fiscal year. For the same reasons, the Company has typically reported lower or flat revenues in the first two quarters of a fiscal year than in the last two quarters of the previous year, resulting in lower Operating Margins in the first two quarters. The Company historically has generated greater revenues in the third and fourth quarters while maintaining lower rates of expense growth and expanded Operating Margins. Past financial performance is not a reliable indicator of future performance, and there can be no assurances that this pattern will be maintained. Future operating results are also dependent on sustained performance improvement by the Company's international offices. In this regard, the economy in Europe has been somewhat depressed in the past year, with relatively high unemployment. The Company's operations and financial results could be significantly adversely affected by issues such as changes in foreign currency exchange rates, sluggish regional economic conditions and difficulties in staffing and managing international operations. Many systems and applications software vendors are experiencing difficulties internationally, particularly in Europe. The European office whose results have been and are expected to be the most significant to the Company's overall results is the German office, which accounted for over 33% of total International revenues in each of the prior three fiscal years. The Company derived approximately 84% of its revenues in the first quarter of fiscal 1998 from software products for IBM and IBM-compatible mainframe computers. IBM continues to focus on reducing the overall software costs associated with the OS/390 mainframe platform. Further, IBM continues, directly and through third parties, to enhance its utilities for IMS and DB2 to provide lower cost alternatives to those provided by the Company and other independent software vendors. The Company has traditionally maintained sufficient performance and functional advantages over IBM's base utilities, although there can be no assurance that it will continue to maintain such advantages. Fees from enterprise license transactions remain fundamental components of the Company's revenues. In first quarter of fiscal 1998, enterprise license fees for future additional processing capacity and license restructurings comprised approximately 26% of total revenues. These revenues are 15 16 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) dependent upon the Company's customers' continuing to perceive an increasing need to use the Company's existing software products on substantially greater mainframe processing capacity in future periods. The Company believes that the demand for enterprise licenses has been driven by customers' re-commitment over the last 24 to 36 months to the OS/390 mainframe platform for large scale, transaction intensive information systems. Whether this trend will continue is difficult to predict. If the Company's customers' processing capacity growth were to slow and/or if such customers were to perceive alternatives to relying upon the Company's current mainframe products, the Company's revenues would be adversely impacted. Capacity-based upgrade fees associated with both current and future processing capacity contributed 35% of total revenues in the first quarter of fiscal 1998. The charging of upgrade fees based on CPU tier classifications is standard among mainframe systems software vendors, including IBM. The pricing of mainframe systems software, including the charging of tier-based upgrade fees or other capacity-based fees, is under continued pressure from customers. Although the Company has adopted MIPS-based pricing for enterprise licenses, it has not significantly changed the fact that customers pay more to use its products on more powerful CPUs. The Company believes its current pricing policies properly reflect the value provided by its products. IBM provides alternatives to tier-based pricing with respect to its large mainframe CPUs and is attempting to reduce the costs of its mainframe systems software to increase the overall cost competitiveness of its mainframe hardware and software products. These actions have increased pricing pressures within the mainframe systems software markets. The Company's growth prospects are dependent upon the success of its existing client/server products and those anticipated to be introduced in the future. The Company has experienced long development cycles and product delays in the past, particularly with some of its client/server products, and expects to have delays in the future. Delays in new mainframe or client/server product introductions or less-than-anticipated market acceptance of these new products are possible and would have an adverse effect on the Company's revenues and earnings. New products or new versions of existing products may, despite testing, contain undetected errors or bugs that will delay the introduction or adversely affect commercial acceptance of such products. The enterprise systems management market that the Company's client/server products address is characterized by rapid change and intense competition that continues to increase as vendors within the broader markets converge. Certain of the Company's competitors and potential competitors have significantly greater financial, technical, sales and marketing resources than the Company and greater experience in client/server development and sales. A key factor in determining the success of the Company's products, particularly its client/server offerings, will be their ability to interoperate and perform well with existing and future leading database management systems and other systems software products supported by the Company's products. While the Company believes its products that address this market, including those under development, will compete effectively, this market will be relatively unpredictable over the next few years and there can be no assurance that anticipated results will be achieved. 16 17 BMC SOFTWARE, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Microsoft Corporation has significantly increased its focus on developing operating systems, systems management products and databases that will provide "business-critical" class functionality. Specifically, Microsoft is aggressively promoting its BackOffice(TM) family of software products, including its Windows NT Server operating system and its SQL Server relational database management system, as lower cost alternatives to the UNIX operating systems coupled with relational database management systems from Oracle Corporation, Sybase, Inc., Informix Corporation and other vendors. Microsoft could significantly lower software price points in some of the Company's markets, which could place additional pricing pressure on the Company. The Company has invested and intends to continue to invest in the development of systems management products for Windows NT and BackOffice environments, but there are numerous uncertainties associated with the Company's ability to successfully execute this strategy. Litigation seeking to enforce patents, copyrights and trade secrets is increasing in the software industry. There can be no assurance that third parties will not assert that their patent or other proprietary rights are violated by products offered by the Company. Any such claims, with or without merit, can be time consuming and expensive to defend and could have an adverse effect on the Company's business, results of operations, financial position and cash flows. 17 18 BMC SOFTWARE, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 27 Financial Data Schedule (b) Reports on Form 8-K. None 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BMC SOFTWARE, INC. Date: August 14, 1997 By: /s/ Max P. Watson Jr. --------------------- Max P. Watson Jr. Chairman of the Board, President and Chief Executive Officer Date: August 14, 1997 By: /s/ William M. Austin --------------------- William M. Austin Senior Vice President and Chief Financial Officer Date: August 14, 1997 By: /s/ Kevin M. Klausmeyer ----------------------- Kevin M. Klausmeyer Chief Accounting Officer
19 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 3-MOS MAR-31-1998 APR-01-1997 JUN-30-1997 1 100,346 469,098 86,932 (5,721) 0 256,412 179,374 (54,089) 887,510 240,429 0 0 0 1,050 551,936 887,510 107,746 158,414 17,515 157,146 0 0 0 7,416 17,979 (10,563) 0 0 0 (10,563) (.10) (.10)
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