BMC Software Announces Fiscal 2010 Second Quarter Results

BMC Software (NASDAQ:BMC) today announced its fiscal 2010 second quarter results.

Fiscal 2010 second quarter total revenue was $462 million, a decrease of 1 percent from the year-ago period. License revenue was $174 million, a decrease of 1 percent compared to the second quarter of fiscal 2009. On a constant currency basis, both total revenue and license revenue were roughly flat.

The Company’s GAAP net earnings for the quarter were $94 million, or $0.50 per diluted share, versus $70 million and $0.36 per diluted share in the year-ago period. The Company’s non-GAAP net earnings for the fiscal second quarter, excluding special items, were $123 million, or $0.66 per diluted share, compared to $108 million, or $0.56 per diluted share, in the year-ago quarter. Included in the financial tables is a complete reconciliation between non-GAAP and GAAP results.

“Our solid performance in the quarter underscores our continued market leadership, technological innovation and operating discipline,” said Bob Beauchamp, BMC’s chairman and chief executive officer. “The need for more productive and efficient IT management has never been greater. To meet this demand, we remain focused on investing in our business to enhance our industry-leading, highly dynamic Business Service Management platform.”

The Company posted the following key results for the fiscal 2010 second quarter:

• Total bookings were $431 million, up 6 percent as reported and 4 percent on a constant currency basis. Total bookings showed significant improvement compared to the first quarter, increasing by 10 percent sequentially.
• ESM license bookings were $109 million in the second quarter, down 9 percent from the year-ago period. ESM license bookings increased by over 50 percent sequentially.
• Total MSM annualized bookings for the trailing twelve months were $248 million, down 6 percent from $264 million compared to the year-ago period, but down only 1 percent on a constant currency basis.
• ESM non-GAAP operating income increased to $71 million from $40 million. ESM non-GAAP operating margin increased by 12 percentage points to 26 percent.
• MSM non-GAAP operating income was $104 million compared to $109 million in the year-ago period. MSM non-GAAP operating margin was 56 percent compared to 58 percent.
• The Company’s balance sheet remains strong, with $1.3 billion in cash and investments and $1.7 billion in deferred revenue.

During the second quarter, BMC increased its stock repurchase activities from the prior quarter, spending $75 million to repurchase 2.1 million shares. As of September 30, 2009, the Company has approximately $220 million remaining under its existing share repurchase program.

Steve Solcher, BMC’s chief financial officer, said: “We delivered solid second quarter financial results in what remains a challenging macroeconomic environment. We demonstrated significant sequential improvement as total bookings increased 10% and ESM license bookings increased over 50% compared to the first quarter. We also had strong growth compared to a year ago in total bookings, operating margin, earnings per share, and cash flow from operations.”

Fiscal 2010 Expectations

As it did last quarter, the Company is once again increasing its full-year non-GAAP EPS guidance. The Company is reiterating guidance for all other key metrics.

The Company expects non-GAAP earnings per share in the range of $2.55 to $2.65 per share, which at the midpoint would represent a 15 percent increase year-over-year and a 7 percent increase compared to the Company’s initial fiscal 2010 guidance. This range excludes an estimated range of $0.61 to $0.65 per share for special items, including expenses related to the amortization of acquired technology and intangibles, stock-based compensation and restructuring activity.

The assumptions underlying this full year fiscal 2010 estimate include:

• Total bookings and revenue growth in the low single digits on a reported basis. At today’s rates, the Company expects currency impacts to have a slightly positive impact on both revenue and bookings;
• A license bookings ratable rate in the low 50’s versus 50 percent in fiscal 2009 as the Company expects to return to a more normal volume of large transactions with complex terms and conditions; and
• A non-GAAP tax rate of 29 percent.

The Company also expects full year fiscal 2010 cash flow from operations to be between $600 million and $650 million, unchanged from prior expectations.

Conference Call

A conference call to discuss second quarter fiscal 2010 results is scheduled for today, October 29, 2009 at 4:00 pm Central Time. Those interested in participating may call (913) 312-0640 and use the pass code BMC. To access a replay of the conference call, that will be available for one week, dial (719) 457-0820 or (888) 203-1112 and use the pass code BMC. A live web cast of the conference call will be available on the Company's website at www.bmc.com/investors. A replay of the web cast will be available within 24 hours and archived on the website.

Use of Non-GAAP Financial Measures

In an effort to provide investors with additional information regarding the Company’s results as determined by U.S. generally accepted accounting principles (GAAP), the Company has also disclosed in this press release and the accompanying tables the following non-GAAP information: (a) non-GAAP operating expenses, (b) non-GAAP operating income, (c) non-GAAP operating margin, (d) non-GAAP net earnings and (e) non-GAAP diluted net earnings per share. Each of these financial measures excludes the impact of certain items and therefore has not been calculated in accordance with GAAP. These non-GAAP financial measures exclude the amortization of intangible assets, charges related to in-process research and development, share-based compensation expenses and restructuring charges, as well as the related tax impacts on these items. Each of the adjustments is described in more detail below. This press release also contains a reconciliation of each of these non-GAAP measures to its most comparable GAAP financial measure.

We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our operating results because they exclude amounts that BMC management and the Board of Directors do not consider part of operating results when assessing the performance of the organization and measuring the results of the Company’s performance. In addition, we have historically reported similar non-GAAP financial measures. We believe that inclusion of these non-GAAP financial measures provides consistency and comparability with past reports of financial results. BMC Management and the Board of Directors use these non-GAAP financial measures to evaluate the Company’s performance and for forecasting purposes, as well as the allocation of future capital investments, and they are key variables in determining management incentive compensation. Accordingly, we believe these non-GAAP financial measures are useful to investors in allowing for greater transparency of supplemental information used by management in its financial and operational decision-making.

While we believe that these non-GAAP financial measures provide useful supplemental information, there are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. Items such as the amortization of intangible assets, charges related to in-process research and development, share-based compensation expenses and restructuring charges that are excluded from our non-GAAP financial measures can have a material impact on net earnings. As a result, these non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, net earnings, cash flow from operations or other measures of performance prepared in accordance with GAAP. We compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measure. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures that are included elsewhere in this press release.

The following discusses the reconciliations of our non-GAAP financial measures to the most comparable GAAP financial measures:

• Amortization of intangible assets. Our non-GAAP financial measures exclude costs associated with the amortization of intangible assets. Management and the Board of Directors believe it is useful in evaluating the Company’s and its management teams’ and business units’ performance during a particular time period to review the supplemental non-GAAP financial measures, which exclude amortization of intangible assets, because these costs are fixed at the time of an acquisition, are then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management after the acquisition. Accordingly, management and the Board of Directors do not consider these costs for purposes of evaluating the performance of the business during the applicable time period after the acquisition, and they exclude such costs when evaluating the performance of the Company, its business units and its management teams and when making decisions to allocate resources among the Company’s business units.

• In-process research and development charges. Our non-GAAP financial measures exclude in-process research and development charges recorded in prior year periods. These amounts represent the estimated fair value of core research and development projects that were incomplete as of the respective dates of acquisition and had neither reached technological feasibility nor been determined to have alternative future uses pending achievement of technological feasibility upon further development. Such amounts were required to be expensed by us as of the date of the respective acquisition. Because the costs are fixed at the time of acquisition and are not subject to management influence, management does not consider the costs in evaluating the performance of the Company and its business units nor when it allocates resources among the business units. We believe excluding these items is useful to investors because it facilitates comparisons to our historical operating results without being affected by our acquisition history and the results of other companies in our industry, which have their own unique acquisition histories.

• Share-based compensation expenses. Our non-GAAP financial measures exclude the compensation expenses required to be recorded by GAAP for equity awards to employees and directors. Management and the Board of Directors believe it is useful in evaluating the Company’s and its management teams’ and business units’ performance during a particular time period to review the supplemental non-GAAP financial measures, which exclude expenses related to share-based compensation, because these costs are generally fixed at the time an award is granted, are then expensed over several years and generally cannot be changed or influenced by management once granted. Accordingly, our operational managers are evaluated based on the operating expenses exclusive of share-based compensation expenses and including such charges would hamper investors’ ability to evaluate the performance of our management in the manner in which the Company’s management evaluates performance. Additionally, we believe it is useful in measuring the Company’s performance to exclude expenses related to share-based compensation expense because it enables comparability with prior period information. Accordingly, management and the Board of Directors do not consider these costs for purposes of evaluating the performance of the business, and they exclude such costs when evaluating the performance of the Company, its business units and its management teams and when making decisions to allocate resources among the Company’s business units.

• Restructuring charges. Our non-GAAP financial measures exclude exit costs and related charges, primarily consisting of severance costs and lease abandonment costs, and any subsequent changes in estimates related to exit activities as they relate to our restructurings, which involved significant layoffs. Management and the Board of Directors believe it is useful in evaluating the Company’s and its management teams’ and business units’ performance during a particular time period to review the supplemental non-GAAP financial measures, which exclude restructuring costs, because our operational managers are evaluated based on the operating expenses exclusive of restructuring charges and including the restructuring charges would hinder investors’ ability to evaluate the performance of our management in the manner in which the Company’s management evaluates performance. Accordingly, management and the Board of Directors do not consider these costs for purposes of evaluating the performance of the business, and they exclude such costs when evaluating the performance of the Company, its business units and its management teams. Additionally, management uses the non-GAAP measures to assist in its determinations regarding the allocation of resources, such as capital investment, among the Company’s business units and as part of its forecasting and budgeting.

In this press release we refer to certain bookings information. Bookings represent the transactional value of new contracts executed by us and reflected in our financial statements, including amounts recorded to both revenue and deferred revenue. We also refer to growth rates for revenue and bookings at constant currency or adjusting for currency so that the business results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of the Company’s business performance. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates.

Business runs on IT. IT runs on BMC Software.

Business thrives when IT runs smarter, faster and stronger. That’s why the most demanding IT organizations in the world rely on BMC Software across both distributed and mainframe environments. Recognized as the leader in Business Service Management, BMC offers a comprehensive approach and unified platform that helps IT organizations cut cost, reduce risk and drive business profit. For the four fiscal quarters ended September 30, 2009, BMC revenue was approximately $1.88 billion. Visit www.bmc.com for more information.

This news release and other related public statements we make contain both historical information and forward-looking information. Statements of plans, objectives, strategies and expectations for future operations and results, identified by words such as “believe,” “anticipate,” “expect,” “estimate” and “guidance” are forward-looking statements. Numerous important factors affect BMC Software's operating results and could cause BMC Software's actual results to differ materially from the forecasts and estimates indicated by this press release or by any other forward-looking statements made by, or on behalf of, BMC Software, and there can be no assurance that future results will meet expectations, estimates or projections. These factors include, but are not limited to, the following: 1) the possibility that general economic conditions or uncertainty cause information technology spending to be reduced or purchasing decisions to be delayed; 2) competition in our markets can result in pricing pressures and competition for new customers as well as potential displacements of our existing customers; 3) our cash flow from operations could be affected by many factors, including, but not limited to, lengthening sales cycles, the size and timing of bookings, customer payment terms, the timing of collections, increased expenses, reduced net earnings and movement in foreign currency exchange rates; 4) a significant percentage of our license transactions are completed during the final weeks and days of each quarter, which creates a level of uncertainty as to whether revenue, license bookings and/or earnings will have met expectations until after the end of the quarter; 5) our operating costs and expenses are relatively fixed over the short term, so if we have a shortfall in revenue in any given quarter, our ability to offset revenue shortfalls in the near-term is limited; 6) changes to our sales organization, including personnel and process changes, may have unintended negative consequences; 7) our expectations for revenue and earnings are based on an assumption of the percentage of license revenue which will be recognized upfront versus deferred; if our actual results do not match our assumption, our recognized revenue and resultant earnings could fall short of expectations; 8) our effective tax rate is subject to quarterly fluctuation and any change in such tax rate could affect our earnings; and 9) the additional risks and important factors described in BMC Software's Annual Report on Form 10-K and quarterly reports on Form 10-Q filed with the U.S. Securities and Exchange Commission. These filings are available on our website at www.bmc.com/investors. We undertake no obligation to update information contained in this release.

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