BMC SOFTWARE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) It is important that this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) be read in conjunction with: (i) the attached unaudited condensed consolidated financial statements and notes thereto, (ii) the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2012, and (iii) our discussion of risks and uncertainties included within the section entitled Risk Factors in our Annual Report on Form 10-K for the year ended March 31, 2012.

This MD&A contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which are identified by the use of the words "believe," "expect," "anticipate," "estimate," "will," "contemplate," "would" and similar expressions that contemplate future events. Such forward-looking statements are based on management's reasonable current assumptions and expectations. Numerous important factors, risks and uncertainties, including but not limited to those summarized under Risk Factors in our Annual Report on Form 10-K for the year ended March 31, 2012, affect our operating results and could cause our actual results, levels of activity, performance or achievement to differ materially from the results expressed or implied by these or any other forward-looking statements made by us or on our behalf. There can be no assurance that future results will meet expectations.

BMC, BMC Software and the BMC Software logo are the exclusive properties of BMC Software, Inc., are registered with the U.S. Patent and Trademark Office, and may be registered or pending registration in other countries. All other BMC trademarks, service marks and logos may be registered or pending registration in the U.S. or in other countries. All other trademarks or registered trademarks are the property of their respective owners.

Unless indicated otherwise, results of operations data in this MD&A are presented in accordance with United States generally accepted accounting principles (GAAP). Additionally, in an effort to provide investors with additional information regarding our results of operations, certain non-GAAP financial measures including non-GAAP operating income, non-GAAP net earnings and non-GAAP diluted earnings per share are provided in this MD&A. See Non-GAAP Financial Measures and Reconciliations below for an explanation of our use of non-GAAP financial measures and reconciliations to their corresponding measures calculated in accordance with GAAP.

19-------------------------------------------------------------------------------- Table of Contents Overview A summary of select operating metrics for the quarter and nine months ended December 31, 2012 is as follows: • Total bookings, which represent the contract value of new transactions that we closed and recorded, were $514.3 million for the quarter, representing a decrease of $10.1 million, or 1.9%, from the prior year quarter, and for the nine months ended December 31, 2012 were $1,415.0 million, representing a decrease of $107.2 million, or 7.0%, from the prior year period. Within the first nine months of the prior fiscal year, one large transaction generated total bookings of over $100 million, principally related to our MSM business.

• Total license bookings were $228.3 million for the quarter, representing a decrease of $8.5 million, or 3.6%, from the prior year quarter, and for the nine months ended December 31, 2012 were $544.0 million, representing a decrease of $72.8 million, or 11.8%, from the prior year period. During the quarter, we closed 41 transactions with license bookings over $1 million (with total license bookings of $115.4 million) compared to 42 transactions with license bookings over $1 million (with total license bookings of $117.7 million) in the prior year quarter. During the nine months ended December 31, 2012, we closed 96 transactions with license bookings over $1 million (with total license bookings of $262.5 million) compared to 110 transactions with license bookings over $1 million (with total license bookings of $336.2 million) in the prior year period.

• Within our ESM-Solutions segment, where we evaluate performance on the basis of license bookings, total license bookings for the quarter decreased by $10.3 million, or 8.2%, from the prior year quarter, and for the nine months ended December 31, 2012 decreased by $19.4 million, or 5.5%, from the prior year period. We estimate that the impact of foreign currency exchange rate changes, while nominal for the quarter, contributed to an approximate $4 million, or 1%, reduction in ESM license bookings for the nine month period. The license bookings decreases for both the quarter and nine month periods were driven primarily by a number of large, forecasted license transactions that failed to close at the end of the quarter, which we attribute to a combination of difficult macroeconomic conditions, perceived uncertainty related to our strategic announcements early in the quarter and preceding press coverage related to activist investor activity, as well as internal sales execution issues.

Additionally, while sales force capacity has reached planned levels, we believe that overall productivity for both the quarter and nine month periods was negatively impacted by lower sales force and sales management tenure and experience levels, particularly in certain regions.

• Within our MSM segment, where we evaluate performance based on total and annualized bookings, total bookings for the trailing twelve months ended December 31, 2012 decreased by $161.4 million, or 17.4%, and on an annualized basis, after normalizing for contract length, decreased by $38.6 million, or 13.2%, as compared to the prior year period. These trailing twelve month decreases were attributable primarily to the large prior year transaction referred to above as well as the timing of other transaction renewal cycles. Over the trailing 36 months ended December 31, 2012, total MSM bookings decreased by $35.6 million, or 1.4%, and on an annualized basis, after normalizing for contract length, decreased by $9.9 million, or 1.2%, as compared to the prior year period.

• Total revenue for the quarter was $580.2 million, representing an increase of $32.0 million, or 5.8%, over the prior year quarter, and for the nine months ended December 31, 2012 was $1,632.8 million, representing an increase of $25.5 million, or 1.6%, over the prior year period. Revenue contributed by Numara Software, Inc., which we acquired during the fourth quarter of fiscal 2012, was $20.2 million and $56.3 million for the quarter and nine months ended December 31, 2012, respectively. The increase in revenue for the quarter was reflective of increases of $7.3 million, or 3.2%, $16.4 million, or 6.0%, and $8.3 million, or 16.3%, in license, maintenance and professional services revenue, respectively. The increase for the nine months ended December 31, 2012 was reflective of increases of $45.6 million, or 5.6%, and $11.0 million, or 7.1%, in maintenance and professional services revenue, respectively, partially offset by a decrease of $31.1 million, or 4.8%, in license revenue. On a segment basis, ESM-Solutions revenue for the quarter increased by $14.2 million, or 5.0%, ESM-Services revenue increased by $8.3 million, or 16.3%, and MSM revenue increased by $9.5 million, or 4.4%, as compared to the prior year quarter. For the nine months ended December 31, 2012, ESM-Solutions revenue increased by $7.5 million, or 0.9%, ESM-Services revenue increased by $11.0 million, or 7.1%, and MSM revenue increased by $7.0 million, or 1.1%, over the prior year period. We estimate that foreign currency exchange rate fluctuations negatively affected revenue by approximately $3 million, or 1%, for the quarter, and approximately $19 million, or 1%, for the nine months ended December 31, 2012, as compared to the respective prior year periods, on a constant currency basis.

• Operating income for the quarter was $147.6 million, representing a decrease of $14.2 million, or 8.8%, from the prior year quarter, and for the nine months ended December 31, 2012 was $359.6 million, representing a decrease of $78.3 million, or 17.9%, from the prior year period. Non-GAAP operating income for the quarter was $210.2 million, representing a decrease of $2.5 million, or 1.2%, from the prior year quarter, and for the nine months ended December 31, 2012 was $556.6 million, representing a decrease of $43.0 million, or 7.2%, from the prior year period.

20 -------------------------------------------------------------------------------- Table of Contents • Net earnings for the quarter were $106.3 million, representing a decrease of $13.6 million, or 11.3%, from the prior year quarter, and for the nine months ended December 31, 2012 were $258.3 million, representing a decrease of $72.0 million, or 21.8%, from the prior year period. Non-GAAP net earnings for the quarter were $150.5 million, representing a decrease of $6.4 million, or 4.1%, from the prior year quarter, and for the nine months ended December 31, 2012 were $397.2 million, representing a decrease of $42.4 million, or 9.6%, from the prior year period.

• Diluted earnings per share for the quarter was $0.70, representing a decrease of $0.01 per share, or 1.4%, from the prior year quarter, and for the nine months ended December 31, 2012 was $1.63, representing a decrease of $0.25 per share, or 13.3%, from the prior year period. Non-GAAP diluted earnings per share was $0.99, representing an increase of $0.06 per share, or 6.5%, over the prior year quarter, and for the nine months ended December 31, 2012 was $2.50, representing a decrease of $0.01 per share, or 0.4%, from the prior year period.

• Cash flows from operations for the nine months ended December 31, 2012 were $417.9 million, representing a decrease of $169.5 million, or 28.9%, from the prior year period. We closed out the quarter with a solid balance sheet at December 31, 2012, including $1.3 billion in cash, cash equivalents and investments and $1.8 billion in deferred revenue.

We continue to invest in our technology leadership, including in the areas of cloud computing and software-as-a-service (SaaS). In addition to our ongoing product development efforts, we consummated three strategic acquisitions in our ESM segment during the nine months ended December 31, 2012, acquiring Abydos Limited, a provider of workflow management solutions, VaraLogix, Inc., an application release automation provider, and my-eService, Inc., a provider of self-service IT support solutions.

We also continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. In October 2012, our Board of Directors approved a new $1 billion stock repurchase program, and in November 2012, we entered into an accelerated share repurchase agreement to repurchase $750 million of our common stock under this program. Initial shares received under this repurchase agreement were 13.1 million, for a total value of $525.0 million. During the quarter and nine months ended December 31, 2012, we repurchased a total of 14.3 million and 22.6 million shares, respectively, for a total value of $575.0 million and $925.0 million, respectively.

Our earnings are subject to volatility as a significant portion of our operating expenses is fixed in the short-term, and we plan a portion of our expense run-rate based on our expectations of future revenue. In addition, a significant amount of our license transactions are completed during the final weeks and days of each quarter and therefore, we generally do not know whether revenue has met our expectations until after the end of the quarter. If a shortfall in revenue were to occur in any given quarter, there would be an immediate, and possibly significant, impact to our overall earnings and, most likely, our stock price.

Because our software solutions are designed for and marketed to companies looking to improve the management of their IT infrastructure and processes, demand for our products, and therefore our financial results, are dependent upon customers continuing to value such solutions and to invest in such technology.

There are a number of trends that have historically influenced demand for IT management software, including, among others, business demands placed on IT, computing capacity within IT departments, complexity of IT systems and IT operational costs. Our financial results are also influenced by many economic and industry conditions, including, but not limited to, general economic and market conditions in the United States and other economies in which we market products, changes in foreign currency exchange rates, general levels of customer spending, IT budgets, the competitiveness of the IT management software and solutions industry, the adoption rate for Business Service Management and the stability of the mainframe market.

21-------------------------------------------------------------------------------- Table of Contents Results of Operations and Financial Condition The following table sets forth, for the periods indicated, the percentages that selected items in the condensed consolidated statements of comprehensive income represent of total revenue. These financial results are not necessarily indicative of future results.

Percentage of Total Revenue Quarter Ended Nine Months Ended December 31, December 31, 2012 2011 2012 2011 Revenue: License 40.0 % 41.0 % 37.5 % 40.1 % Maintenance 49.8 % 49.7 % 52.2 % 50.2 % Professional services 10.2 % 9.3 % 10.2 % 9.7 % Total revenue 100.0 % 100.0 % 100.0 % 100.0 % Operating expenses: Cost of license revenue 7.1 % 7.0 % 7.4 % 7.2 % Cost of maintenance revenue 8.8 % 8.4 % 9.5 % 8.7 % Cost of professional services revenue 9.7 % 9.6 % 10.3 % 9.5 % Selling and marketing expenses 30.3 % 28.1 % 30.8 % 28.1 % Research and development expenses 7.2 % 7.0 % 7.1 % 7.6 % General and administrative expenses 9.7 % 9.2 % 10.7 % 10.0 % Amortization of intangible assets 1.7 % 1.1 % 2.1 % 1.6 % Total operating expenses 74.6 % 70.5 % 78.0 % 72.8 % Operating income 25.4 % 29.5 % 22.0 % 27.2 % Other loss, net (1.8 )% (0.6 )% (1.6 )% (0.6 )% Earnings before income taxes 23.6 % 28.9 % 20.5 % 26.6 % Provision for income taxes 5.3 % 7.0 % 4.6 % 6.1 % Net earnings 18.3 % 21.9 % 15.8 % 20.5 % 22 -------------------------------------------------------------------------------- Table of Contents Revenue The following tables provide information regarding software license and software maintenance revenue for the quarters and nine months ended December 31, 2012 and 2011: Quarter Ended Nine Months Ended December 31, December 31, Software License Revenue 2012 2011 % Change 2012 2011 % Change (In millions) (In millions) Enterprise Service Management $ 131.3 $ 133.7 (1.8 )% $ 357.4 $ 398.2 (10.2 )% Mainframe Service Management 101.0 91.3 10.6 % 255.7 246.0 3.9 % Total software license revenue $ 232.3 $ 225.0 3.2 % $ 613.1 $ 644.2 (4.8 )% Quarter Ended Nine Months Ended December 31, December 31, Software Maintenance Revenue 2012 2011 % Change 2012 2011 % Change (In millions) (In millions) Enterprise Service Management $ 164.3 $ 147.7 11.2 % $ 482.8 $ 434.5 11.1 % Mainframe Service Management 124.4 124.6 (0.2 )% 370.2 372.9 (0.7 )% Total software maintenance revenue $ 288.7 $ 272.3 6.0 % $ 853.0 $ 807.4 5.6 % Quarter Ended Nine Months Ended December 31, December 31, Total Software Revenue 2012 2011 % Change 2012 2011 % Change (In millions) (In millions) Enterprise Service Management $ 295.6 $ 281.4 5.0 % $ 840.2 $ 832.7 0.9 % Mainframe Service Management 225.4 215.9 4.4 % 625.9 618.9 1.1 % Total software revenue $ 521.0 $ 497.3 4.8 % $ 1,466.1 $ 1,451.6 1.0 % Software License Revenue License revenue for the quarter ended December 31, 2012 was $232.3 million, an increase of $7.3 million, or 3.2%, over the prior year quarter. This increase was attributable to an increase in MSM license revenue, partially offset by a decrease in ESM license revenue, as further discussed below. Recognition of license revenue that was deferred in prior periods increased $2.3 million for the quarter ended December 31, 2012 as compared to the prior year quarter. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront was 58% in the current quarter as compared to 55% in the prior year quarter.

License revenue for the nine months ended December 31, 2012 was $613.1 million, a decrease of $31.1 million, or 4.8%, from the prior year period. This decrease was attributable to a decrease in ESM license revenue, partially offset by an increase in MSM license revenue, as further discussed below. Recognition of license revenue that was deferred in prior periods decreased $16.2 million for the nine months ended December 31, 2012 as compared to the prior year period. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront was 59% in the current nine month period as compared to 54% in the prior year period.

ESM license revenue was $131.3 million, or 56.5%, and $357.4 million, or 58.3%, of our total license revenue for the quarter and nine months ended December 31, 2012, respectively, and $133.7 million, or 59.4%, and $398.2 million, or 61.8%, of our total license revenue for the quarter and nine months ended December 31, 2011, respectively. ESM license revenue for the quarter ended December 31, 2012 decreased by $2.4 million, or 1.8%, from the prior year quarter, due to a $4.8 million reduction in upfront license revenue recognized in connection with new transactions, partially offset by a $2.4 million increase in the recognition of previously deferred license revenue. The decrease in upfront license revenue recognized in the quarter ended December 31, 2012 was attributable to a decrease in license transaction bookings, partially offset by a higher percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms. ESM license revenue for the nine months ended December 31, 2012 decreased by $40.8 million, or 10.2%, from the prior year period, due to a $19.7 million decrease in the recognition of previously deferred license revenue and a $21.0 million reduction in upfront license revenue in connection with new transactions. The decrease in upfront license revenue recognized in the nine months ended December 31, 2012 was attributable to a decrease in license transaction bookings along with a lower percentage of such bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms.

23-------------------------------------------------------------------------------- Table of Contents MSM license revenue was $101.0 million, or 43.5%, and $255.7 million, or 41.7%, of our total license revenue for the quarter and nine months ended December 31, 2012, and $91.3 million, or 40.6%, and $246.0 million, or 38.2%, of our total license revenue for the quarter and nine months ended December 31, 2011. MSM license revenue for the quarter ended December 31, 2012 increased by $9.7 million, or 10.6%, over the prior year quarter. This increase was due primarily to a $9.8 million increase in the amount of upfront license revenue recognized in connection with new transactions, while the recognition of previously deferred license revenue remained relatively flat. The increase in upfront license revenue recognized in the quarter ended December 31, 2012 was attributable to an increase in the percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms along with an increase in license transaction bookings. MSM license revenue for the nine months ended December 31, 2012 increased by $9.7 million, or 3.9%, over the prior year period, due to a $6.2 million increase in upfront license revenue in connection with new transactions and a $3.5 million increase in the recognition of previously deferred license revenue. The increase in upfront license revenue recognized in the nine months ended December 31, 2012 was attributable to a higher percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms, partially offset by a decrease in license transaction bookings.

Deferred License Revenue For the quarters ended December 31, 2012 and 2011, our recognized license revenue was impacted by the changes in our deferred license revenue balance as follows: Quarter Ended Nine Months Ended December 31, December 31, 2012 2011 2012 2011 (In millions) Deferrals of license revenue $ 94.9 $ 107.6 $ 224.0 $ 281.6 Recognition from deferred license revenue (98.1 ) (95.8 ) (290.8 ) (307.0 ) Impact of foreign currency exchange rate changes (0.8 ) - (2.3 ) (2.0 ) Net increase (decrease) in deferred license revenue $ (4.0 ) $ 11.8 $ (69.1 ) $ (27.4 ) Deferred license revenue balance at end of period $ 621.6 $ 658.7 $ 621.6 $ 658.7 The primary reasons for license revenue deferrals include, but are not limited to, customer transactions that include products for which the maintenance pricing is based on a combination of undiscounted license list prices, net license fees or discounted license list prices, certain arrangements that include unlimited licensing rights, time-based licenses that are recognized over the term of the arrangement, customer transactions that include products with differing maintenance periods and other transactions for which we do not have or are not able to determine vendor-specific objective evidence of the fair value of the maintenance and/or professional services. The contract terms and conditions that result in deferral of revenue recognition for a given transaction result from arm's length negotiations between us and our customers.

We anticipate our transactions will continue to include such contract terms that result in deferral of the related license revenue as we expand our offerings to meet customers' product, pricing and licensing needs.

Once it is determined that license revenue for a particular contract must be deferred, based on the contractual terms and application of revenue recognition policies to those terms, we recognize such license revenue either ratably over the term of the contract or when the revenue recognition criteria are met.

Because of this, we generally know the timing of the subsequent recognition of license revenue at the time of deferral. Therefore, the amount of license revenue to be recognized from the deferred revenue balance in each future quarter is generally predictable. At December 31, 2012, the deferred license revenue balance was $621.6 million. Estimated future recognition from deferred license revenue at December 31, 2012 is (in millions): Remainder of fiscal 2013 $ 92.6 Fiscal 2014 260.7 Fiscal 2015 and thereafter 268.3 $ 621.6 24 -------------------------------------------------------------------------------- Table of Contents Software Maintenance Revenue Maintenance revenue for the quarter ended December 31, 2012 was $288.7 million, an increase of $16.4 million, or 6.0%, over the prior year quarter, due to an increase in ESM maintenance revenue, partially offset by a nominal decrease in MSM maintenance revenue, as discussed below. Maintenance revenue for the nine months ended December 31, 2012 was $853.0 million, an increase of $45.6 million, or 5.6%, over the prior year period, due to an increase in ESM maintenance revenue, partially offset by a decrease in MSM maintenance revenue, as discussed below. Maintenance revenue included revenue from our SaaS offerings, which is included in our ESM segment, of $6.8 million and $2.6 million for the quarters ended December 31, 2012 and 2011, respectively, and $18.7 million and $6.0 million for the nine months ended December 31, 2012 and 2011, respectively.

ESM maintenance revenue was $164.3 million, or 56.9%, and $482.8 million, or 56.6%, of our total maintenance revenue for the quarter and nine months ended December 31, 2012, respectively, and $147.7 million, or 54.2%, and $434.5 million, or 53.8%, of our total maintenance revenue for the quarter and nine months ended December 31, 2011, respectively. ESM maintenance revenue for the quarter ended December 31, 2012 increased by $16.6 million, or 11.2%, over the prior year quarter. ESM maintenance revenue for the nine months ended December 31, 2012 increased by $48.3 million, or 11.1%, over the prior year period. These increases were attributable primarily to an expanded installed ESM customer license base and increases in SaaS subscription revenue.

MSM maintenance revenue was $124.4 million, or 43.1%, and $370.2 million, or 43.4%, of our total maintenance revenue for the quarter and nine months ended December 31, 2012, respectively, and $124.6 million, or 45.8%, and $372.9 million, or 46.2%, of our total maintenance revenue for the quarter and nine months ended December 31, 2011, respectively. MSM maintenance revenue for the quarter ended December 31, 2012 decreased by $0.2 million, or 0.2%, from the prior year quarter. MSM maintenance revenue for the nine months ended December 31, 2012 decreased by $2.7 million, or 0.7%, from the prior year period.

Deferred Maintenance Revenue At December 31, 2012, the deferred maintenance revenue balance was $1.1 billion.

Estimated future recognition from deferred maintenance revenue at December 31, 2012 is (in millions): Remainder of fiscal 2013 $ 210.7 Fiscal 2014 503.4 Fiscal 2015 and thereafter 397.4 $ 1,111.5 25 -------------------------------------------------------------------------------- Table of Contents Domestic vs. International Revenue Quarter Ended Nine Months Ended December 31, December 31, 2012 2011 % Change 2012 2011 % Change (In millions) (In millions) License: Domestic $ 101.0 $ 107.4 (6.0 )% $ 282.7 $ 314.9 (10.2 )% International 131.3 117.6 11.6 % 330.4 329.3 0.3 % Total license revenue 232.3 225.0 3.2 % 613.1 644.2 (4.8 )% Maintenance: Domestic 158.0 144.6 9.3 % 470.8 432.5 8.9 % International 130.7 127.7 2.3 % 382.2 374.9 1.9 % Total maintenance revenue 288.7 272.3 6.0 % 853.0 807.4 5.6 % Professional services: Domestic 26.4 25.7 2.7 % 77.4 77.1 0.4 % International 32.8 25.2 30.2 % 89.3 78.6 13.6 % Total professional services revenue 59.2 50.9 16.3 % 166.7 155.7 7.1 % Total domestic revenue 285.4 277.7 2.8 % 830.9 824.5 0.8 % Total international revenue 294.8 270.5 9.0 % 801.9 782.8 2.4 % Total revenue $ 580.2 $ 548.2 5.8 % $ 1,632.8 $ 1,607.3 1.6 % We estimate that foreign currency exchange rate fluctuations caused an approximate $3 million and $19 million decrease in our international revenue for the quarter and nine months ended December 31, 2012, respectively, as compared to the respective prior year periods.

Domestic License Revenue Domestic license revenue was $101.0 million, or 43.5%, and $282.7 million, or 46.1%, of our total license revenue for the quarter and nine months ended December 31, 2012, respectively, and $107.4 million, or 47.7%, and $314.9 million, or 48.9%, of our total license revenue for the quarter and nine months ended December 31, 2011, respectively. Domestic license revenue for the quarter ended December 31, 2012 decreased by $6.4 million, or 6.0%, from the prior year quarter, due to a $4.4 million decrease in ESM license revenue and a $2.0 million decrease in MSM license revenue. Domestic license revenue for the nine months ended December 31, 2012 decreased by $32.2 million, or 10.2%, from the prior year period, due to a $27.5 million decrease in ESM license revenue and a $4.7 million decrease in MSM license revenue.

International License Revenue International license revenue was $131.3 million, or 56.5%, and $330.4 million, or 53.9%, of our total license revenue for the quarter and nine months ended December 31, 2012, respectively, and $117.6 million or 52.3%, and $329.3 million, or 51.1%, of our total license revenue for the quarter and nine months ended December 31, 2011, respectively.

International license revenue for the quarter ended December 31, 2012 increased by $13.7 million, or 11.6%, over the prior year quarter, due to an $11.6 million increase in MSM license revenue and a $2.1 million increase in ESM license revenue. The MSM license revenue increase was attributable primarily to increases of $13.7 million and $1.2 million in our Europe, Middle East and Africa (EMEA) and Asia Pacific markets, respectively, partially offset by a decrease of $3.1 million in our Canada market. The ESM license revenue increase was attributable primarily to an $11.4 million increase in our Asia Pacific market, partially offset by decreases of $7.4 million and $1.9 million in our EMEA and Canada markets, respectively.

International license revenue for the nine months ended December 31, 2012 increased by $1.1 million, or 0.3%, over the prior year period, due to a $14.4 million increase in MSM license revenue, partially offset by a $13.3 million decrease in ESM license revenue. The MSM license revenue increase was attributable to increases of $11.2 million, $4.5 million and $2.3 million in our EMEA, Asia Pacific and Latin America markets, respectively, partially offset by a $3.6 million decrease in our Canada market. The ESM license revenue decrease was attributable to decreases of $16.5 million, $3.1 million and $1.7 million in our EMEA, Canada and Latin America markets, respectively, partially offset by an $8.0 million increase in our Asia Pacific market.

26-------------------------------------------------------------------------------- Table of Contents Domestic Maintenance Revenue Domestic maintenance revenue was $158.0 million, or 54.7%, and $470.8 million, or 55.2%, of our total maintenance revenue for the quarter and nine months ended December 31, 2012, respectively, and $144.6 million, or 53.1%, and $432.5 million, or 53.6%, of our total maintenance revenue for the quarter and nine months ended December 31, 2011, respectively. Domestic maintenance revenue for the quarter ended December 31, 2012 increased by $13.4 million, or 9.3%, over the prior year quarter, due to a $13.2 million increase in ESM maintenance revenue and a $0.2 million increase in MSM maintenance revenue. Domestic maintenance revenue for the nine months ended December 31, 2012 increased by $38.3 million, or 8.9%, over the prior year period, due to a $36.2 million increase in ESM maintenance revenue and a $2.1 million increase in MSM maintenance revenue.

International Maintenance Revenue International maintenance revenue was $130.7 million, or 45.3%, and $382.2 million, or 44.8%, of our total maintenance revenue for the quarter and nine months ended December 31, 2012, respectively, and $127.7 million or 46.9%, and $374.9 million, or 46.4%, of our total maintenance revenue for the quarter and nine months ended December 31, 2011, respectively.

International maintenance revenue for the quarter ended December 31, 2012 increased by $3.0 million, or 2.3%, over the prior year quarter, due to a $3.4 million increase in ESM maintenance revenue, partially offset by a $0.4 million decrease in MSM maintenance revenue. The ESM maintenance revenue increase was attributable primarily to increases of $2.1 million and $1.0 million in our Asia Pacific and Canada markets, respectively.

International maintenance revenue for the nine months ended December 31, 2012 increased by $7.3 million, or 1.9%, over the prior year period, due to a $12.1 million increase in ESM maintenance revenue, partially offset by a $4.8 million decrease in MSM maintenance revenue. The ESM maintenance revenue increase was attributable primarily to increases of $5.3 million, $4.6 million and $2.7 million in our Asia Pacific, EMEA and Canada markets, respectively. The MSM maintenance revenue decrease was attributable primarily to decreases of $3.3 million and $2.4 million in our Latin America and EMEA markets, respectively.

Professional Services Revenue Professional services revenue for the quarter ended December 31, 2012 increased by $8.3 million, or 16.3%, over the prior year quarter, which is reflective of a $7.6 million, or 30.2%, increase in international professional services revenue and a $0.7 million, or 2.7%, increase in domestic professional services revenue.

This increase was attributable primarily to increases in implementation, consulting and education services revenue period over period. Professional services revenue for the nine months ended December 31, 2012 increased by $11.0 million, or 7.1%, over the prior year period, which is reflective of a $10.7 million, or 13.6%, increase in international professional services revenue and a $0.3 million, or 0.4%, increase in domestic professional services revenue.

This increase was attributable primarily to increases in implementation and consulting revenue, partially offset by a decrease in education services revenue period over period.

Operating Expenses Quarter Ended Nine Months Ended December 31, December 31, 2012 2011 % Change 2012 2011 % Change (In millions) (In millions) Cost of license revenue $ 41.1 $ 38.6 6.5 % $ 120.8 $ 116.2 4.0 % Cost of maintenance revenue 51.3 46.2 11.0 % 155.1 139.5 11.2 % Cost of professional services revenue 56.3 52.8 6.6 % 168.5 153.4 9.8 % Selling and marketing expenses 175.8 154.1 14.1 % 503.7 452.3 11.4 % Research and development expenses 41.9 38.5 8.8 % 116.5 121.5 (4.1 )% General and administrative expenses 56.2 50.4 11.5 % 175.1 160.0 9.4 % Amortization of intangible assets 10.0 5.8 72.4 % 33.5 26.5 26.4 % Total operating expenses $ 432.6 $ 386.4 12.0 % $ 1,273.2 $ 1,169.4 8.9 % We estimate that foreign currency exchange rate fluctuations caused an approximate $2 million and $25 million decrease in our international operating expenses for the quarter and nine months ended December 31, 2012, respectively, as compared to the respective prior year periods.

27-------------------------------------------------------------------------------- Table of Contents Cost of License Revenue Cost of license revenue consists primarily of the amortization of capitalized software costs for internally developed products, the amortization of acquired technology for products acquired through business combinations, license-based royalties to third parties and production and distribution costs for initial product licenses. For the quarter and nine months ended December 31, 2012, cost of license revenue was $41.1 million, or 7.1%, and $120.8 million, or 7.4%, of total revenue, respectively, and 17.7% and 19.7% of license revenue, respectively. For the quarter and nine months ended December 31, 2011, cost of license revenue was $38.6 million, or 7.0%, and $116.2 million, or 7.2%, of total revenue, respectively, and 17.2% and 18.0% of license revenue, respectively.

Cost of license revenue for the quarter ended December 31, 2012 increased by $2.5 million, or 6.5%, over the prior year quarter. This increase was attributable primarily to a $5.2 million increase in the amortization of capitalized software development costs, partially offset by a $3.2 million decrease in the amortization of acquired technology. Cost of license revenue for the nine months ended December 31, 2012 increased by $4.6 million, or 4.0%, over the prior year period. This increase was attributable to a $10.6 million increase in the amortization of capitalized software development costs and a $1.8 million increase in share-based compensation expense, partially offset by a $5.7 million decrease in the amortization of acquired technology and a $2.1 million net decrease in other expenses. The increases in the amortization of capitalized software development costs are related to increases in the amount of costs capitalized in prior periods related to development activities and represented an increased investment in software development. The decreases in amortization of acquired technology were attributable to a reduction in amortization associated with intangible assets acquired in connection with past acquisitions that became fully amortized, partially offset by an increase in amortization associated with intangible assets acquired in connection with our fiscal 2012 and 2013 acquisitions.

Cost of Maintenance Revenue Cost of maintenance revenue consists primarily of the costs associated with customer support and research and development personnel that provide maintenance, enhancement and support services to our customers, as well as internal and third party infrastructure hosting and support costs associated with our SaaS offerings. For the quarter and nine months ended December 31, 2012, cost of maintenance revenue was $51.3 million, or 8.8%, and $155.1 million, or 9.5%, of total revenue, respectively, and 17.8% and 18.2% of maintenance revenue, respectively. For the quarter and nine months ended December 31, 2011, cost of maintenance revenue was $46.2 million, or 8.4%, and $139.5 million, or 8.7%, of total revenue, respectively, and 17.0% and 17.3% of maintenance revenue, respectively.

Cost of maintenance revenue for the quarter ended December 31, 2012 increased by $5.1 million, or 11.0%, over the prior year quarter. This increase was attributable to a $3.6 million increase in personnel costs and a $1.5 million net increase in other expenses.

Cost of maintenance revenue for the nine months ended December 31, 2012 increased by $15.6 million, or 11.2%, over the prior year period. This increase was attributable to a $7.8 million increase in personnel costs, a $3.3 million increase in third party SaaS hosting and support costs, a $1.3 million increase in share-based compensation expense, a $1.2 million increase in third party maintenance outsourcing costs and a $2.0 million net increase in other expenses.

Cost of Professional Services Revenue Cost of professional services revenue consists primarily of salaries, related personnel costs and third party subcontracting fees associated with implementation, consulting and education services that we provide to our customers and the related infrastructure to support this business. For the quarter and nine months ended December 31, 2012, cost of professional services revenue was $56.3 million, or 9.7%, and $168.5 million, or 10.3%, of total revenue, respectively, and 95.1% and 101.1% of professional services revenue, respectively. For the quarter and nine months ended December 31, 2011, cost of professional services revenue was $52.8 million, or 9.6%, and $153.4 million, or 9.5%, of total revenue, respectively, and 103.7% and 98.5% of professional services revenue, respectively.

Cost of professional services revenue for the quarter ended December 31, 2012 increased by $3.5 million, or 6.6%, over the prior year quarter. This increase was attributable to a $2.3 million increase in personnel and related costs, due principally to an increase in professional services headcount, and a $1.2 million net increase in other expenses.

Cost of professional services revenue for the nine months ended December 31, 2012 increased by $15.1 million, or 9.8%, over the prior year period. This increase was attributable to a $13.2 million increase in personnel and related costs, due principally to an increase in professional services headcount, a $1.1 million increase in facilities expense and a $2.0 million net increase in other expenses, partially offset by a $1.2 million decrease in third party subcontracting fees.

28 -------------------------------------------------------------------------------- Table of Contents Selling and Marketing Expenses Selling and marketing expenses consist primarily of salaries, related personnel costs, sales commissions and costs associated with advertising, marketing, industry trade shows and sales seminars. For the quarter and nine months ended December 31, 2012, selling and marketing expenses were $175.8 million, or 30.3%, and $503.7 million, or 30.8%, of total revenue, respectively. For the quarter and nine months ended December 31, 2011, selling and marketing expenses were $154.1 million, or 28.1%, and $452.3 million, or 28.1%, of total revenue, respectively.

Selling and marketing expenses for the quarter ended December 31, 2012 increased by $21.7 million, or 14.1%, over the prior year quarter. This increase was attributable to a $9.3 million increase in sales personnel and related costs, a $7.1 million increase in share-based compensation expense, both principally due to an increase in sales personnel headcount as well as sales retention efforts, a $2.7 million increase in bad debt expense, a $1.0 million increase in marketing campaign expenditures and a $1.6 million net increase in other expenses.

Selling and marketing expenses for the nine months ended December 31, 2012 increased by $51.4 million, or 11.4%, over the prior year period. This increase was attributable to a $25.0 million increase in sales personnel and related costs, a $15.9 million increase in share-based compensation expense, both principally due to an increase in sales personnel headcount as well as sales retention efforts, a $2.6 million increase in bad debt expense, a $2.5 million increase in marketing campaign expenditures, a $2.1 million increase in third party consulting fees, a $1.5 million increase in facilities expense and a $1.8 million net increase in other expenses.

Research and Development Expenses Research and development expenses consist primarily of salaries and personnel costs and third party subcontracting fees related to software developers and development support personnel, including product management, software programmers, testing and quality assurance personnel and writers of technical documentation, such as product manuals and installation guides. These expenses also include computer hardware and software costs, telecommunications costs and personnel costs associated with our development and production labs. For the quarter and nine months ended December 31, 2012, research and development expenses were $41.9 million, or 7.2%, and $116.5 million, or 7.1%, of total revenue, respectively. For the quarter and nine months ended December 31, 2011, research and development expenses were $38.5 million, or 7.0%, and $121.5 million, or 7.6%, of total revenue, respectively.

Research and development expenses for the quarter ended December 31, 2012 increased by $3.4 million, or 8.8%, over the prior year quarter. This increase was attributable to a $4.5 million decrease in capitalized research and development costs related to software development projects, a $1.9 million increase in share-based compensation expense, a $1.6 million increase in third party contractor fees and a $1.6 million net increase in other expenses, partially offset by a $6.2 million decrease in personnel costs.

Research and development expenses for the nine months ended December 31, 2012 decreased by $5.0 million, or 4.1%, from the prior year period. This decrease was attributable to a $15.1 million decrease in personnel costs, partially offset by a $4.6 million increase in third party contractor fees, a $2.4 million decrease in capitalized research and development costs related to software development projects, a $1.8 million increase in share-based compensation expense and a $1.3 million net increase in other expenses.

General and Administrative Expenses General and administrative expenses consist primarily of salaries and related personnel costs of executive management, finance and accounting, facilities management, legal and human resources. Other costs included in general and administrative expenses include fees paid for outside accounting and legal services, consulting projects and insurance. For the quarter and nine months ended December 31, 2012, general and administrative expenses were $56.2 million, or 9.7%, and $175.1 million, or 10.7%, of total revenue, respectively. For the quarter and nine months ended December 31, 2011, general and administrative expenses were $50.4 million, or 9.2%, and $160.0 million, or 10.0%, of total revenue, respectively.

General and administrative expenses for the quarter ended December 31, 2012 increased by $5.8 million, or 11.5%, over the prior year quarter. This increase was attributable primarily to a $4.8 million increase in personnel costs and a $2.2 million increase in professional fees, partially offset by a $1.3 million reduction in proxy contest costs.

29-------------------------------------------------------------------------------- Table of Contents General and administrative expenses for the nine months ended December 31, 2012 increased by $15.1 million, or 9.4%, over the prior year period. This increase was attributable to a $6.9 million increase in personnel costs, a $4.9 million increase in proxy contest costs, a $4.9 million increase in other professional fees and a $1.7 million increase in share-based compensation expense, partially offset by a $3.3 million net decrease in other expenses.

Amortization of Intangible Assets Amortization of intangible assets consists of the amortization of customer relationships and other intangible assets recorded in connection with our business combinations. For the quarter and nine months ended December 31, 2012, amortization of intangible assets was $10.0 million and $33.5 million, respectively. For the quarter and nine months ended December 31, 2011, amortization of intangible assets was $5.8 million and $26.5 million, respectively.

Amortization of intangible assets for the quarter ended December 31, 2012 increased by $4.2 million, or 72.4%, over the prior year period. This increase was attributable primarily to an accounting correction made during the prior year quarter, related to the foreign currency impacts of certain intangible assets associated with a fiscal 2000 business combination, which had the effect of decreasing intangible asset amortization expense by $4.5 million for the quarter ended December 31, 2011.

Amortization of intangible assets for the nine months ended December 31, 2012 increased by $7.0 million, or 26.4%, over the prior year period. This increase was attributable primarily to the accounting correction recorded in the prior year period, as noted above, which had the effect of decreasing intangible asset amortization expense by $4.5 million for the nine months ended December 31, 2011. The remaining increase is due to amortization associated with intangible assets acquired in connection with our fiscal 2012 and 2013 acquisitions, partially offset by a reduction in amortization associated with intangible assets acquired in connection with past acquisitions that became fully amortized.

Other Income (Loss), Net Other income (loss), net, consists primarily of interest earned, realized gains and losses on investments, interest expense on our outstanding borrowings and foreign currency gains and losses. Other income (loss), net, for the quarter and nine months ended December 31, 2012, was a loss of $10.6 million and $25.4 million, respectively. Other income (loss), net, for the quarter and nine months ended December 31, 2011, was a loss of $3.5 million and $9.9 million, respectively.

The change in other income (loss), net for the quarter ended December 31, 2012 was attributable primarily to an $8.2 million increase in interest expense, primarily due to the issuance of our senior unsecured notes due February 2022 and December 2022 and the execution of our unsecured term loan due November 2015 (the Term Loan), partially offset by an increase in net gains on investments of $1.6 million.

The change in other income (loss), net for the nine months ended December 31, 2012 was attributable primarily to an $18.4 million increase in interest expense, primarily due to the issuance of our senior unsecured notes due February 2022 and December 2022 and the execution of our Term Loan, partially offset by an increase in net gains on investments of $4.0 million.

Income Taxes Income tax expense was $30.7 million and $75.9 million for the quarter and nine months ended December 31, 2012, respectively, resulting in effective tax rates of 22.4% and 22.7%, respectively. Income tax expense was $38.4 million and $97.7 million for the quarter and nine months ended December 31, 2011, respectively, resulting in effective tax rates of 24.3% and 22.8%, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with earnings from lower tax rate jurisdictions throughout the world and our policy of indefinitely reinvesting earnings from certain jurisdictions (primarily in Europe), as well as due to additional accruals, changes in estimates, releases and settlements with taxing authorities related to our uncertain tax positions and benefits associated with income attributable to both domestic production activities and the extraterritorial income exclusion. During the quarter and nine months ended December 31, 2012, the overall favorable effect of foreign tax rates on our effective tax rate was 9.6% and 9.4% of pre-tax earnings, respectively. During the quarter and nine months ended December 31, 2011, the overall favorable effect of foreign tax rates on our effective tax rate was 7.3% and 8.6% of pre-tax earnings, respectively. During the nine months ended December 31, 2011, we also recorded discrete net tax benefits of $6.2 million associated with tax authority settlements related to prior years' tax matters which favorably impacted our effective tax rate by 1.4% of pre-tax earnings. Our effective tax rate could fluctuate on a quarterly basis and could be adversely affected to the extent forecasted earnings for the year are lower than anticipated in countries with lower statutory rates and higher than anticipated in countries with higher statutory rates.

30 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures and Reconciliations In an effort to provide investors with additional information regarding our results as determined by GAAP, we disclose various non-GAAP financial measures in our quarterly earnings press releases and other public disclosures. The primary non-GAAP financial measures we focus on are: (i) non-GAAP operating income, (ii) non-GAAP net earnings, and (iii) non-GAAP diluted 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 share-based compensation expense; the amortization of intangible assets; severance, exit costs and related charges; proxy contest costs; as well as the related tax impacts of these items; and certain discrete tax items. Each of the non-GAAP adjustments is described in more detail below. A reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure is also included below.

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 core operating results when assessing the performance of the organization. In addition, we have historically reported similar non-GAAP financial measures and we believe that inclusion of these non-GAAP financial measures provides consistency and comparability with past reports of financial results.

Accordingly, we believe these non-GAAP financial measures are useful to investors in allowing for greater transparency of supplemental information used by management.

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 share-based compensation expense; the amortization of intangible assets; severance, exit costs and related charges; proxy contest costs; as well as the related tax impacts of these items; and certain discrete tax items 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 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 reconciling 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 below.

31 -------------------------------------------------------------------------------- Table of Contents For a detailed explanation of the adjustments made to comparable GAAP financial measures, the reasons why management uses these measures and the usefulness of these measures, see items (1) - (6) below.

Quarter Ended Nine Months Ended December 31, December 31, 2012 2011 2012 2011 (In millions) Operating income: GAAP operating income $ 147.6 $ 161.8 $ 359.6 $ 437.9 Share-based compensation expense (1) 41.5 31.1 115.9 92.7 Amortization of intangible assets (2) 20.5 19.5 67.4 66.1 Severance, exit costs and related charges (3) 1.9 0.3 8.8 2.9 Proxy contest costs (4) (1.3 ) - 4.9 - Non-GAAP operating income $ 210.2 $ 212.7 $ 556.6 $ 599.6 Quarter Ended Nine Months Ended December 31, December 31, 2012 2011 2012 2011 (In millions) Net earnings: GAAP net earnings $ 106.3 $ 119.9 $ 258.3 $ 330.3 Share-based compensation expense (1) 41.5 31.1 115.9 92.7 Amortization of intangible assets (2) 20.5 19.5 67.4 66.1 Severance, exit costs and related charges (3) 1.9 0.3 8.8 2.9 Proxy contest costs (4) (1.3 ) - 4.9 - Provision for income taxes on above pre-tax non-GAAP adjustments (5) (18.4 ) (13.9 ) (58.1 ) (46.2 ) Certain discrete tax items (6) - - - (6.2 ) Non-GAAP net earnings $ 150.5 $ 156.9 $ 397.2 $ 439.6 Quarter Ended Nine Months Ended December 31, December 31, 2012 2011 2012 2011 Diluted earnings per share*: GAAP diluted earnings per share $ 0.70 $ 0.71 $ 1.63 $ 1.88 Share-based compensation expense (1) 0.27 0.18 0.73 0.53 Amortization of intangible assets (2) 0.13 0.12 0.42 0.38 Severance, exit costs and related charges (3) 0.01 - 0.06 0.02 Proxy contest costs (4) (0.01 ) - 0.03 - Provision for income taxes on above pre-tax non-GAAP adjustments (5) (0.12 ) (0.08 ) (0.37 ) (0.26 ) Certain discrete tax items (6) - - - (0.04 ) Non-GAAP diluted earnings per share* $ 0.99 $ 0.93 $ 2.50 $ 2.51 * Non-GAAP diluted earnings per share is computed independently for each period presented. The sum of GAAP diluted earnings per share and non-GAAP adjustments per share may not equal non-GAAP diluted earnings per share due to rounding differences.

(1) Share-based compensation expense. 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 corporate performance during a particular time period to review the supplemental non-GAAP financial measures, excluding 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.

32 -------------------------------------------------------------------------------- Table of Contents (2) Amortization of intangible assets. Our non-GAAP financial measures exclude costs associated with the amortization of intangible assets, which are included in cost of license revenue and amortization of intangible assets in our condensed consolidated statements of comprehensive income. Management and the Board of Directors believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures, excluding 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.

(3) Severance, exit costs and related charges. Our non-GAAP financial measures exclude severance, exit costs and related charges, and any subsequent changes in estimates, as they relate to our corporate restructuring and exit activities. Management and the Board of Directors believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures, excluding severance, exit costs and related charges, in order to provide comparability and consistency with historical operating results.

(4) Proxy contest costs. During the first quarter of fiscal 2013, the Company became engaged in a proxy contest initiated by a shareholder of the Company.

We recorded a charge of approximately $6.2 million for unplanned proxy contest expenses during the first quarter of fiscal 2013, consisting primarily of outside financial advisory, legal, solicitation and consulting fees. During the third quarter of fiscal 2013, we renegotiated certain of these fees and recorded a corresponding reduction to proxy contest costs.

Management and the Board of Directors believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures, excluding such costs, in order to provide comparability and consistency with historical operating results.

(5) Provision for income taxes on above pre-tax non-GAAP adjustments. Our non-GAAP financial measures exclude the tax impact of the above pre-tax non-GAAP adjustments. This amount is calculated using the tax rates of each country to which these pre-tax non-GAAP adjustments relate. Management excludes the non-GAAP adjustments on a net-of-tax basis in evaluating our performance. Therefore, we exclude the tax impact of these charges when presenting non-GAAP financial measures.

(6) Certain discrete tax items. Our non-GAAP financial measures exclude net tax benefits of $6.2 million for the nine months ended December 31, 2011 associated with tax authority settlements related to prior years' tax matters. Management excludes the impact of these items in evaluating our performance. Therefore, we exclude these items when presenting non-GAAP financial measures.

Liquidity and Capital Resources At December 31, 2012, we had $1.3 billion in cash, cash equivalents and investments, approximately 77% of which was held by our international subsidiaries and was largely generated from our international operations. Our international operations have generated $715.8 million of earnings that we have determined will be invested indefinitely in those operations. If such earnings were to be repatriated, we would incur a United States federal income tax liability that is not currently accrued in our financial statements. We also had outstanding letters of credit, performance bonds and similar instruments at December 31, 2012 of approximately $52.3 million primarily in support of performance obligations to various customers, but also related to facilities and other obligations.

At December 31, 2012 and March 31, 2012, we held auction rate securities with a par value of $21.7 million and $29.3 million, respectively, which were classified as available-for-sale. The total estimated fair value of our auction rate securities was $18.7 million and $26.9 million at December 31, 2012 and March 31, 2012, respectively. Our auction rate securities consist entirely of bonds issued by public agencies that are backed by student loans with at least a 97% guarantee by the federal government under the United States Department of Education's Federal Family Education Loan Program. All of these bonds are currently rated investment grade by Moody's or Standard and Poor's. Auctions for these securities began failing in early 2008 and have continued to fail, resulting in our continuing to hold such securities and the issuers paying interest at the maximum contractual rates. We do not believe that any of the underlying issuers of these auction rate securities is presently at risk of default or that the underlying credit quality of the assets backing the auction rate security investments has been impacted by the reduced liquidity of these investments. Due to the illiquidity in the auction rate securities market caused by failed auctions, we estimated the fair value of these securities using internally developed models of the expected cash flows of the securities on a discounted basis. These models incorporate assumptions about the expected cash flows of the underlying student loans discounted at an estimate of the rate of return required by investors, which includes an adjustment to reflect a lack of liquidity in the market for these securities. Periodically, the issuers of certain of our auction rate securities have redeemed portions of our holdings at par value plus accrued interest. There were no redemptions during the quarter ended December 31, 2012. During the nine months ended December 31, 2012, issuers redeemed available-for-sale holdings of $7.6 million par value. During the quarter and nine months ended December 31, 2011, issuers redeemed available-for-sale holdings of $0.1 million and $0.5 million par value, respectively.

33 -------------------------------------------------------------------------------- Table of Contents In June 2008, we issued $300.0 million of senior unsecured notes due June 2018.

Net proceeds to us after original issuance discount and issuance costs amounted to $295.6 million. These senior notes were issued at an original issuance discount of $1.8 million and bear interest at a rate of 7.25% per annum, payable semi-annually in June and December of each year. These senior notes are redeemable at our option at any time in whole or, from time to time, in part at a redemption price equal to the greater of: (i) 100% of the principal amount of these senior notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted at the applicable United States Treasury rate plus 50 basis points, plus accrued and unpaid interest.

In February 2012, we issued $500.0 million of senior unsecured notes due February 2022. Net proceeds to us after original issuance discount and issuance costs amounted to $493.3 million. These senior notes were issued at an original issuance discount of $2.7 million and bear interest at a rate of 4.25% per annum, payable semi-annually in February and August of each year. These senior notes are redeemable at our option at any time in whole or, from time to time, in part at a redemption price equal to the greater of: (i) 100% of the principal amount of these senior notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted at the applicable United States Treasury rate plus 35 basis points, plus accrued and unpaid interest.

In November 2012, we issued $300.0 million of senior unsecured notes due December 2022. Net proceeds to us after original issuance discount and issuance costs amounted to $295.1 million. These senior notes were issued at an original issuance discount of $2.3 million and bear interest at a rate of 4.5% per annum, payable semi-annually in June and December of each year. These senior notes are redeemable at our option at any time in whole or, from time to time, in part at a redemption price equal to the greater of: (i) 100% of the principal amount of these senior notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted at the applicable United States Treasury rate plus 45 basis points, plus accrued and unpaid interest.

In November 2012, we entered into a $200.0 million unsecured term loan agreement, due November 2015, with an institutional lender. Net proceeds to us after issuance costs amounted to $199.6 million. The Term Loan bears interest at a variable rate equal to the one-month LIBOR plus 1.625%, based upon our current debt rating, and is payable monthly. The Term Loan may be prepaid at our option any time after the second anniversary of the closing date at the principal amount plus a 0.50% premium. We concurrently entered into an interest rate swap agreement to hedge the variability of cash interest payments due to changes in the LIBOR benchmark interest rate, fixing our interest rate at 2.033%. The interest rate swap matures in November 2015 and has periodic interest settlements, both consistent with the terms of our Term Loan. We have designated the interest rate swap as a cash flow hedge of the variability of interest payments under the Term Loan due to changes in the LIBOR benchmark interest rate. At December 31, 2012, the fair value of our interest rate swap was a liability of $0.2 million and was recorded within other liabilities in our condensed consolidated balance sheets.

In November 2010, we entered into a credit agreement with certain institutional lenders providing for an unsecured revolving credit facility in an amount up to $400.0 million which is scheduled to expire on November 30, 2014 (the Credit Facility). Subject to certain conditions, at any time prior to maturity, we may invite existing and new lenders to increase the size of the Credit Facility up to a maximum of $600.0 million. The Credit Facility includes provisions for swing line loans of up to $25.0 million and standby letters of credit of up to $50.0 million. Revolving loans under the Credit Facility bear interest, at the Company's option, at a rate equal to either (i) the base rate (as defined) plus a margin based on the credit ratings of our senior unsecured notes due June 2018, or (ii) the LIBOR rate (as defined) plus a margin based on the credit ratings of our senior notes due June 2018, for interest periods of one, two, three or six months. As of December 31, 2012 and through January 28, 2013, we have not borrowed any funds under the Credit Facility.

These credit facilities are subject to covenants limiting, among other things, the creation of liens securing indebtedness and sale-leaseback transactions.

We believe that our existing cash and investment balances, funds generated from operating activities and available credit under the Credit Facility will be sufficient to meet our working and other capital requirements for the foreseeable future. In the normal course of business, we evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with or investing in these businesses. We may elect to use available cash and investments to fund such activities in the future. In the event additional needs for cash arise, we might find it advantageous to utilize third party financing sources based on factors such as our then available cash and its source (i.e., cash held in the United States versus international locations), the cost of financing and our internal cost of capital.

34-------------------------------------------------------------------------------- Table of Contents We may from time to time seek to repurchase or retire securities, including outstanding borrowings and equity securities, in open market repurchases, unsolicited or solicited privately negotiated transactions or in such other manner as will comply with the provisions of the Exchange Act and the rules and regulations thereunder. Such repurchases or exchanges, if any, will depend on a number of factors, including, but not limited to, prevailing market conditions, our liquidity requirements and contractual restrictions, if applicable. The amount of repurchases, which is subject to management discretion, may be material and may change from period to period.

Our cash flows for the nine months ended December 31, 2012 and 2011 were: Nine Months Ended December 31, 2012 2011 (In millions) Net cash provided by operating activities $ 417.9 $ 587.4 Net cash used in investing activities (187.9 ) (279.1 ) Net cash used in financing activities (658.3 ) (627.4 ) Effect of exchange rate changes on cash and cash equivalents (10.7 ) (22.3 ) Net change in cash and cash equivalents $ (439.0 ) $ (341.4 ) Cash Flows from Operating Activities Our primary method for funding operations and growth has been through cash flows generated from operating activities. Net cash provided by operating activities for the nine months ended December 31, 2012 decreased by $169.5 million from the prior year period, attributable primarily to a decrease in net income and the net impact of working capital changes.

Cash Flows from Investing Activities Net cash used in investing activities for the nine months ended December 31, 2012 decreased by $91.2 million from the prior year period. This decrease was attributable primarily to a decrease in cash paid for acquisitions and increases in proceeds from maturities and sales of investments, partially offset by an increase in purchases of investments.

Cash Flows from Financing Activities Net cash used in financing activities for the nine months ended December 31, 2012 increased by $30.9 million over the prior year period, attributable primarily to an increase in purchases of common stock, including accelerated share repurchase, partially offset by an increase in proceeds from borrowings.

Treasury Stock Purchases Our Board of Directors has authorized a total of $6.0 billion to repurchase common stock under a common stock repurchase program, including a new $1 billion stock repurchase authorization approved in October 2012. On November 23, 2012, we entered into an accelerated share repurchase agreement (the ASR) to repurchase $750 million of our common stock under this program. Under the terms of the ASR, we paid $750 million to a financial institution and initially received 13.1 million shares of common stock, or 70% of the number of shares to be repurchased if such shares were repurchased at a price equal to the closing price of our common stock on November 23, 2012. The specific number of shares that we will ultimately repurchase under the ASR will be based generally on the daily discounted volume-weighted average share price of our common stock during the repurchase period, subject to other adjustments pursuant to the terms and conditions of the ASR. The ASR contemplates that the repurchase period will last no longer than approximately seven months from the execution of the agreement.

At the completion of the repurchase period, we may be entitled to receive additional shares of our common stock from the financial institution or, under certain circumstances specified in the ASR, we may be required to deliver shares or make a cash payment (at our option) to the financial institution. Under the terms of the ASR, the maximum number of shares that could be delivered is 25.0 million.

The fair market value of the 13.1 million shares initially delivered was approximately $525.0 million and was included in treasury stock, reducing the weighted average number of basic and diluted common shares used to calculate EPS. The remaining $225.0 million was included in additional paid-in capital (APIC) and will be reclassified from APIC to treasury stock upon final settlement of the ASR. As of December 31, 2012, based on the daily discounted volume-weighted average price of our common stock since the effective date of the ASR, the financial institution would be required to deliver 5.6 million shares to us for the $225.0 million portion of the ASR that has not yet been settled. These shares were not included in the calculation of diluted weighted average common shares outstanding during the period because their effect was anti-dilutive.

35 -------------------------------------------------------------------------------- Table of Contents During the quarter and nine months ended December 31, 2012, we repurchased a total of 14.3 million and 22.6 million shares, respectively, valued at $575.0 million and $925.0 million, respectively, under the Board authorizations.

At December 31, 2012, approximately $700.2 million remains authorized in the stock repurchase program, which does not have an expiration date. During the quarter and nine months ended December 31, 2012, we repurchased 0.4 million and 0.9 million shares, respectively, for $18.1 million and $38.1 million, respectively, to satisfy employee tax withholding obligations upon the vesting of share-based awards.

The repurchase of stock will continue to be funded primarily with existing cash as well as cash generated from domestic operations and, therefore, affects our overall domestic versus international liquidity balances. See PART II. Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds below for a monthly detail of treasury stock purchases for the quarter ended December 31, 2012.

Shareholder Rights Agreement On May 12, 2012, our Board of Directors authorized and declared a dividend of one preferred share purchase right (a Right) for each outstanding common share through a shareholder rights agreement (the Rights Agreement). Each Right, once exercisable, represents the right to purchase one one-thousandth of a series B junior participating preferred share, par value $0.01, for $180, or an equivalent value of common shares determined at 50% of the then-current market price of BMC's common stock, provided sufficient common shares are then unissued. The Rights become exercisable in the event any individual person or entity (including the ownership of their related affiliates) acquires 10% or more of the outstanding share capital of the Company without the approval of BMC's Board of Directors, and until such time are inseparable from and trade with BMC's common stock. The Rights have a de minimus fair value and are accounted for as a component of stockholders' equity. The Rights Agreement expires May 11, 2013.

Critical Accounting Policies and Estimates The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. On an on-going basis, we make and evaluate estimates and judgments, including those related to revenue recognition, capitalized software development costs, share-based compensation, goodwill and intangible assets, valuation of investments and accounting for income taxes. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances; the results of which form the basis for making judgments about amounts and timing of revenue and expenses, the carrying values of assets and the recorded amounts of liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. We have discussed the development and selection of the critical accounting policies and estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our related disclosures. The critical accounting policies related to the estimates and judgments are discussed in our Annual Report on Form 10-K for the year ended March 31, 2012 under Management's Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to our critical accounting policies and estimates during the nine months ended December 31, 2012.

New Accounting Pronouncements Not Yet Adopted In December 2011, the Financial Accounting Standards Board issued guidance requiring new disclosures regarding balance sheet offsetting. This guidance requires entities to disclose the gross amounts of certain recognized financial assets and liabilities, to reconcile these amounts to the net positions recognized in the balance sheet and to provide qualitative disclosures about the rights of offset relating to these financial assets and liabilities. This new disclosure guidance is effective for us beginning with our first quarter of fiscal 2014.

Available Information Our internet website address is http://www.bmc.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available through the investor relations page of our internet website free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our internet website and the information contained therein or connected thereto are not intended to be incorporated into this Quarterly Report on Form 10-Q.

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