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TMCNet:  CA, INC. - 10-Q - : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[January 24, 2013]

CA, INC. - 10-Q - : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statement This Quarterly Report on Form 10-Q (Form 10-Q) contains certain forward-looking information relating to CA, Inc. (which we refer to as the "Company," "Registrant," "CA Technologies," "CA," "we," "our" or "us"), that is based on the beliefs of, and assumptions made by, our management as well as information currently available to management. When used in this Form 10-Q, the words "believes," "plans," "anticipates," "expects," "estimates," "targets" and similar expressions are intended to identify forward-looking information.


Forward-looking information includes, for example, the statements made in this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), but also appears in other parts of this Form 10-Q. This forward-looking information reflects our current views with respect to future events and is subject to certain risks, uncertainties, and assumptions.

The declaration and payment of future dividends is subject to the determination of the Company's Board of Directors, in its sole discretion, after considering various factors, including the Company's financial condition, historical and forecast operating results, and available cash flow, as well as any applicable laws and contractual covenants and any other relevant factors. The Company's practice regarding payment of dividends may be modified at any time and from time to time.

Repurchases under the Company's stock repurchase program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through solicited or unsolicited privately negotiated transactions or otherwise. The program, which is authorized through the fiscal year ending March 31, 2014, does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company's discretion.

A number of important factors could cause actual results or events to differ materially from those indicated by forward-looking statements, including: the ability to achieve success in the Company's strategy by, among other things, effectively rebalancing the Company's sales force to increase penetration in growth markets and with large enterprises that have not historically been significant customers, enabling the sales force to sell new products, improving the Company's brand in the marketplace and ensuring the Company's set of cloud computing, Software-as-a-Service and other new offerings address the needs of a rapidly changing market, while not adversely affecting the demand for the Company's traditional products or its profitability; global economic factors or political events beyond the Company's control; general economic conditions and credit constraints, or unfavorable economic conditions in a particular region, industry or business sector; the failure to adapt to technological changes and introduce new software products and services in a timely manner; competition in product and service offerings and pricing; the failure to expand partner programs; the ability to retain and attract adequate qualified personnel; the ability to integrate acquired companies and products into existing businesses; the ability to adequately manage and evolve financial reporting and managerial systems and processes; the ability of the Company's products to remain compatible with ever-changing operating environments; breaches of the Company's software products and the Company's and customers' data centers and IT environments; discovery of errors in the Company's software and potential product liability claims; the failure to protect the Company's intellectual property rights and source code; risks associated with sales to government customers; access to software licensed from third parties; risks associated with the use of software from open source code sources; access to third-party code and specifications for the development of code; third-party claims of intellectual property infringement or royalty payments; fluctuations in the number, terms and duration of the Company's license agreements as well as the timing of orders from customers and channel partners; the failure to renew large license transactions on a satisfactory basis; changes in market conditions or the Company's credit ratings; fluctuations in foreign currencies; the failure to effectively execute the Company's workforce reductions; successful outsourcing of various functions to third parties; events or circumstances that would require us to record a goodwill impairment charge; potential tax liabilities; acquisition opportunities that may or may not arise; and other factors described more fully in this Form 10-Q and the Company's other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties occur, or should our assumptions prove incorrect, actual results may vary materially from those described in this Form 10-Q as believed, planned, anticipated, expected, estimated, targeted or similarly expressed in a forward-looking manner. We do not intend to update these forward-looking statements, except as otherwise required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements. References in this Form 10-Q to fiscal 2013 and fiscal 2012 are to our fiscal years ending on March 31, 2013 and 2012, respectively.

22-------------------------------------------------------------------------------- Table of Contents OVERVIEW We are the leading independent enterprise information technology (IT) management software and solutions company with expertise across a wide range of IT environments. We develop and deliver software and services that help organizations accelerate, transform and secure their IT infrastructures to deliver flexible IT services. This allows customers to respond faster to business demands for new services, manage the quality of services, increase efficiency and reduce risk. Our products and solutions are designed to operate in a wide range of IT environments - from mainframe and physical to virtual and cloud.

We license our products worldwide. We serve companies across most major industries around the world, including banks, insurance companies, other financial services providers, government agencies, telecommunication providers, manufacturers, technology companies, retailers, educational organizations and health care institutions. These customers typically maintain IT infrastructures across platforms, from physical to virtual and cloud, and from multiple vendors.

These environments are complex and critical to our customers' operations.

As business demands increase and new technologies evolve, demands on IT continue to increase. Organizations expect more from technology and many want to use IT to gain a competitive edge. This means companies are using IT to deliver products to market faster, reach new customers and respond to changes in the competitive environment. To achieve their desired business outcomes and gain business advantages, many organizations are improving the efficiency, mobility and availability of their IT resources and applications by adopting next-generation technologies like virtualization and cloud computing and consuming IT as Software-as-a-Service (SaaS). They are also extending their legacy physical environments to virtual and cloud environments. Virtualization lets users run multiple virtual machines on each physical machine. Cloud computing is a shared pool of computing resources that can be accessed, configured and used as needed. With SaaS, customers can obtain software on a subscription, "pay-as-you-go" model.

While these technologies can reduce operating costs tied to physical infrastructure, this evolution in computing is a transformative opportunity that is also making IT environments more complex. Data centers are evolving to include mainframes, physical servers, virtualized servers and private, public and hybrid (a combination of public and private) cloud environments.

We believe it is vital for companies to effectively accelerate, transform and secure all of their various computing environments, while being able to deliver new services quickly based on their business needs. Our core strengths in IT management and security, combined with our investments in innovative technologies, position us to serve a range of customers which we divided into three customer segments in the fourth quarter of fiscal 2012: (1) approximately 1,000 core large existing enterprise customers with annual revenue in excess of $2 billion (Large Existing Enterprises), which currently account for approximately 80% of our revenue; (2) enterprises with revenue in excess of $2 billion that have not historically been significant customers of ours (Large New Enterprises), a customer segment that we believe includes 4,500 potential new customers but where we intend to initially focus on approximately 1,000 of these customers selected based on our current geographical and vertical strengths; and (3) approximately 7,000 enterprises with revenue between $300 million and $2 billion and in fast growing geographies like Latin America and Asia (Growth Markets). During the first quarter of fiscal 2013, we made organizational changes to allow us to focus better on our customer segmentation. Key aspects of these changes include: consolidating all disciplines associated with our Growth Markets initiatives into one general manager, consolidating our business operations into our finance team, enhancing the processes for evaluating sales opportunities by region and customer segment and increasing executive oversight over key transactions. In addition, we introduced new products and solutions during the third quarter of fiscal 2013 and we expect to introduce new products and solutions during the fourth quarter of fiscal 2013 that we believe should create selling opportunities across all customer segments. All these efforts are designed to accelerate new product sales outside of our contract renewal cycle.

We believe by targeting these customer segments, we are more than doubling our total addressable market. Our customer segmentation initiative has taken longer than anticipated to gain traction. As part of this initiative, we have also developed a new management process intended to improve the visibility and quality of our pipeline. We believe that these initiatives will benefit our performance in the long-term.

Our broad and deep portfolio of software solutions addresses customer needs across computing platforms. We deliver these solutions on-premises or, for certain products, using SaaS.

During fiscal 2012, we began an effort to more fully realize the value of our intellectual property by strategically licensing and/or assigning selected assets within our portfolio. This effort is intended to better position us in the marketplace and allow us the flexibility to reinvest in improving our overall business.

23-------------------------------------------------------------------------------- Table of Contents EXECUTIVE SUMMARY The following is a summary of the analysis of our results contained in our MD&A for the third quarter of fiscal 2013.

Total revenue for the third quarter of fiscal 2013 decreased 5% to $1,195 million compared with $1,263 million in the year-ago period primarily due to a decrease in subscription and maintenance revenue and to a lesser extent a decrease in software fees and other revenue. For the third quarter of fiscal 2012, software fees and other revenue included $39 million in revenue under a license agreement we entered into in connection with a litigation settlement (refer to the "Software Fees and Other" section under Results of Operations for additional information), which contributed three percentage points of the decrease in total revenue. There was also an unfavorable foreign exchange effect of $12 million for the third quarter of fiscal 2013.

Total bookings in the third quarter of fiscal 2013 decreased 2% compared with the year-ago period to $1,261 million primarily due to a year-over-year decline in software fees and other bookings, which are recognized as software fees and other revenue. This was partially offset by an increase in professional services bookings. Total new product and mainframe capacity sales in the third quarter of fiscal 2013 declined by approximately 10% compared with the third quarter of fiscal 2012. Within these bookings, mainframe new product sales decreased primarily as a result of the aforementioned $39 million license fee received in the third quarter of fiscal 2012. Mainframe capacity sales decreased, while enterprise solutions new product sales were consistent with the prior period. We continue to expect the value of our total fiscal 2013 renewals to decline by approximately 10% compared with fiscal 2012. For the third quarter of fiscal 2013, our percentage renewal yield was in the low 90's.

Total expenses before interest and income taxes of $825 million for the third quarter of fiscal 2013 decreased 3% compared with $850 million in the third quarter of fiscal 2012. Total expenses for the third quarter of fiscal 2013 decreased compared with the third quarter of fiscal 2012 primarily as a result of a decrease in selling and marketing, general and administrative and product development and enhancements expenses. These decreases were partially offset by an increase of $18 million in employee severance charges.

Income from continuing operations before interest and income taxes decreased $43 million, or 10%, in the third quarter of fiscal 2013 compared with the year-ago period.

Income tax expense decreased $34 million for the third quarter of fiscal 2013 compared with the year-ago period as a result of the decrease in income before income taxes and the timing of both favorable and unfavorable discrete items in the third quarter of fiscal 2013 compared with the third quarter of fiscal 2012.

Diluted income from continuing operations per share for the third quarter of fiscal 2013 was $0.55, compared with $0.54 in the year-ago period, reflecting an increase in operating income as a result of the decrease in operating expenses and our repurchases of common shares.

For the third quarter of fiscal 2013, our segment performance results were as follows: Mainframe Solutions revenue for the third quarter of fiscal 2013 decreased $60 million from the year-ago period primarily due to the aforementioned $39 million license fee received in the third quarter of fiscal 2012 and a decrease in subscription and maintenance revenue, which is attributable to a decrease in subscription and maintenance bookings due to lower new product and mainframe capacity sales in prior periods. The increase in operating margin for the third quarter of fiscal 2013 was primarily a result of a decrease in selling and marketing expenses and general and administrative expenses.

Enterprise Solutions revenue for the third quarter of fiscal 2013 decreased from the year-ago period due to an unfavorable foreign exchange effect of $4 million. Within Enterprise Solutions, there was an increase in revenue from our security and ITKO products, which was mostly offset by a decrease in revenue from our service assurance, automation and data management products. Primarily as a result of the increase in expenses from severance costs, Enterprise Solutions operating margin for the third quarter of fiscal 2013 declined from 12% to 11% compared with the year-ago period.

Services revenue for the third quarter of fiscal 2013 decreased compared with the third quarter of fiscal 2012 due to a lower amount of billable time on engagements during the quarter. Operating margin for Services decreased to 4% in the third quarter of fiscal 2013 compared with 11% in the third quarter of fiscal 2012 as a result the decrease in revenue and an increase in severance costs.

Total revenue backlog of $7,488 million at December 31, 2012 decreased 7% compared with $8,084 million at December 31, 2011. The current portion of revenue backlog of $3,495 million at December 31, 2012 decreased by 2% compared with the balance of $3,576 million at December 31, 2011. Revenue backlog in the quarter was unfavorably affected by the decline of total bookings in the first six months of fiscal 2013 and the increase in the percentage of bookings recognized as software fees and other revenue in the first nine months of fiscal 2013, which is not included in revenue backlog at December 31, 2012. We expect a continued decline in revenue backlog year-over-year through fiscal 2013 prior to an expected increase in our renewals in fiscal 2014. Generally, we believe that a change in the current portion of revenue backlog on a year-over-year basis is an indicator of future subscription and maintenance revenue performance due to the high percentage of our revenue that is recognized from license agreements that are already committed and being recognized ratably.

24-------------------------------------------------------------------------------- Table of Contents Cash provided by continuing operating activities for the third quarter of fiscal 2013 was $566 million, representing an increase of $170 million compared with the third quarter of fiscal 2012. The increase was primarily due to an increase in cash collections of $178 million, which includes an increase in single installment payments of $150 million. Due to our performance in the first six months of fiscal 2013, the macro-economic environment in which we believe customers are elongating their sales cycles, and the expectation of delaying the closing of some transactions in our pipeline until later in fiscal 2013 and after fiscal 2013, we currently expect lower billings and collections for fiscal 2013 compared with fiscal 2012. As a result, we expect a year-over-year decrease in cash flows from operations for fiscal 2013 compared with fiscal 2012.

QUARTERLY UPDATE • In November 2012, the Company announced that its Board of Directors unanimously adopted a Stockholder Protection Rights Agreement to replace the Company's existing Rights Agreement, which expired on November 30, 2012.

• In December 2012, the Company's Board of Directors elected Michael P.

Gregoire as the Company's Chief Executive Officer and a member of its Board of Directors, effective January 7, 2013. Mr. Gregoire is succeeding William E. McCracken who retired as Chief Executive Officer and a member of the Company's Board, effective January 7, 2013. Mr. Gregoire is a 25-year veteran of the software and IT services industries, most recently as President, Chief Executive Officer and Chairman of the board of directors of Taleo Corporation prior to its acquisition by Oracle Corporation in April 2012.

PERFORMANCE INDICATORS Management uses several quantitative performance indicators to assess our financial results and condition. Following is a summary of the principal quantitative performance indicators that management uses to review performance: Third Quarter Comparison Fiscal 2013 Versus Fiscal 2012 Percent 2013 2012 Change Change (dollars in millions) Total revenue $ 1,195 $ 1,263 $ (68 ) (5 )% Income from continuing operations $ 251 $ 263 $ (12 ) (5 )% Cash provided by operating activities - continuing operations $ 566 $ 396 $ 170 43 % Total bookings $ 1,261 $ 1,284 $ (23 ) (2 )% Subscription and maintenance bookings $ 1,034 $ 1,035 $ (1 ) - % Weighted average subscription and maintenance license agreement duration in years 2.97 3.53 (0.56 ) (16 )% First Nine Months ComparisonFiscal 2013 Versus Fiscal 2012 Percent 2013 2012 Change Change (dollars in millions) Total revenue $ 3,492 $ 3,626 $ (134 ) (4 )% Income from continuing operations $ 713 $ 727 $ (14 ) (2 )% Cash provided by operating activities - continuing operations $ 838 $ 729 $ 109 15 % Total bookings $ 2,651 $ 3,121 $ (470 ) (15 )% Subscription and maintenance bookings $ 2,043 $ 2,484 $ (441 ) (18 )% Weighted average subscription and maintenance license agreement duration in years 2.98 3.48 (0.50 ) (14 )% 25-------------------------------------------------------------------------------- Table of Contents Change Change December 31, From December 31, From Prior 2012 March 31, 2012 Year End 2011 Year Quarter (in millions) Cash, cash equivalents and investments(1) $ 2,548 $ 2,679 $ (131 ) $ 2,539 $ 9 Total debt $ 1,301 $ 1,301 $ - $ 1,309 $ (8 ) Total expected future cash collections from committed contracts(2) $ 5,083 $ 5,745 $ (662 ) $ 5,800 $ (717 ) Total revenue backlog(2) $ 7,488 $ 8,473 $ (985 ) $ 8,084 $ (596 ) Total current revenue backlog(2) $ 3,495 $ 3,714 $ (219 ) $ 3,576 $ (81 ) (1) At December 31, 2012 and March 31, 2012, investments were $195 million and less than $1 million, respectively. At December 31, 2011, investments were $181 million.

(2) Refer to the discussion in the "Liquidity and Capital Resources" section of this MD&A for additional information on expected future cash collections from committed contracts and revenue backlog.

Analyses of our performance indicators shown above and segment performance can be found in the "Results of Operations" and "Liquidity and Capital Resources" sections of this MD&A.

Total Revenue - Total revenue is the amount of revenue recognized during the reporting period from the sale of license, maintenance and professional services agreements. Amounts recognized as subscription and maintenance revenue are recognized ratably over the term of the agreement. Professional services revenue is generally recognized as the services are performed or recognized on a ratable basis over the term of the related software license. Software fees and other revenue generally represents license fee revenue recognized at the inception of a license agreement (up-front basis) and also includes our SaaS revenue, which is recognized as services are provided.

Total Bookings - Total bookings, or sales, includes the incremental value of all subscription, maintenance and professional services contracts and software fees and other contracts entered into during the reporting period and is generally reflective of the amount of products and services during the period that our customers have agreed to purchase from us. Revenue for bookings attributed to sales of software products for which license fee revenue is recognized on an up-front basis is reflected in "Software fees and other" in the Condensed Consolidated Statements of Operations.

As our business strategy has evolved, our management also looks within bookings at total new product and capacity sales, which we define as sales of products or mainframe capacity that are new or in addition to products or mainframe capacity previously contracted for by a customer. The amount of new product and capacity sales for a period, as currently tracked by us, requires estimation by management and has not been historically reported. Within a given period, the amount of new product and capacity sales may not be material to the change in our total bookings or revenue compared with prior periods. New product and capacity sales can be reflected as subscription and maintenance bookings in the period (for which revenue would be recognized ratably over the term of the contract) or in software fees and other bookings (which are recognized as software fees and other revenue in the current period).

Subscription and Maintenance Bookings - Subscription and maintenance bookings is the aggregate incremental amount we expect to collect from our customers over the terms of the underlying subscription and maintenance agreements entered into during a reporting period. These amounts include the sale of products directly by us and may include additional products, services or other fees for which we have not established vendor specific objective evidence (VSOE). Subscription and maintenance bookings also includes indirect sales by distributors and volume partners, value-added resellers and exclusive representatives to end-users, where the contracts incorporate the right for end-users to receive unspecified future software products, and other contracts without these rights entered into in close proximity or contemplation of such agreements. These amounts are expected to be recognized ratably as subscription and maintenance revenue over the applicable term of the agreements. Subscription and maintenance bookings exclude the value associated with certain perpetual licenses, license-only indirect sales, SaaS offerings and professional services arrangements.

The license and maintenance agreements that contribute to subscription and maintenance bookings represent binding payment commitments by customers over periods that range generally from three to five years, although in certain cases customer commitments can be for longer or shorter periods. These current period bookings are often renewals of prior contracts that also had various durations, usually from three to five years. The amount of new subscription and maintenance bookings recorded in a period is affected by the volume, duration and value of contracts renewed during that period. Subscription and maintenance bookings typically increases in each consecutive quarter during a fiscal year, with the first quarter having the least bookings and the fourth quarter having the most bookings. However, subscription and maintenance bookings may not always follow the pattern of increasing in consecutive quarters during a fiscal year, and the quarter-to-quarter differences in subscription and maintenance bookings may vary. Given the varying durations of the contracts being renewed, year-over-year comparisons of bookings are not always indicative of the overall bookings trend.

26-------------------------------------------------------------------------------- Table of Contents Generally, we believe that a change in the current portion of revenue backlog on a year-over-year basis is an indicator of future subscription and maintenance revenue performance due to the high percentage of our revenue that is recognized from license agreements that are already committed and being recognized ratably.

Within bookings, we also consider the yield on our renewals. We define "renewal yield" as the percentage of the renewable value of a prior contract (i.e., the maintenance value and, in the case of non-perpetual licenses, the license value) realized in current period bookings. The renewable value of a prior contract is an estimate affected by various factors including contractual renewal terms, price increases and other conditions. We estimate the aggregated yield for a quarter based on a review of material transactions representing a substantial majority of the dollar value of renewals during the current period. There may be no correlation between year-over-year changes in bookings and year-over-year changes in renewal yield, since renewal yield is based on the renewable value of deals of various durations, most of which are longer than one year.

Additionally, period-to-period changes in subscription and maintenance bookings do not necessarily correlate to changes in cash receipts. The contribution to current period revenue from subscription and maintenance bookings from any single license or maintenance agreement is relatively small, since revenue is recognized ratably over the applicable term for these agreements.

Weighted Average Subscription and Maintenance License Agreement Duration in Years - The weighted average subscription and maintenance license agreement duration in years reflects the duration of all subscription and maintenance agreements executed during a period, weighted by the total contract value of each individual agreement. Weighted average subscription and maintenance license agreement duration in years can fluctuate from period to period depending on the mix of license agreements entered into during a period. Weighted average duration information is disclosed in order to provide additional understanding of the volume of our bookings.

Total Revenue Backlog - Total revenue backlog represents the aggregate amount we expect to recognize as revenue in the future as either subscription and maintenance revenue, professional services revenue or software fees and other revenue associated with contractually committed amounts billed or to be billed as of the balance sheet date. Total revenue backlog is composed of amounts recognized as liabilities in our Condensed Consolidated Balance Sheets as deferred revenue (billed or collected) as well as unearned amounts yet to be billed under subscription and maintenance and software fees and other agreements. Classification of amounts as current and noncurrent depends on when such amounts are expected to be earned and therefore recognized as revenue.

Amounts that are expected to be earned and therefore recognized as revenue in 12 months or less are classified as current, while amounts expected to be earned in greater than 12 months are classified as noncurrent. The portion of the total revenue backlog that relates to subscription and maintenance agreements is recognized as revenue evenly on a monthly basis over the duration of the underlying agreements and is reported as subscription and maintenance revenue in our Condensed Consolidated Statements of Operations. Generally, we believe that a change in the current portion of revenue backlog on a year-over-year basis is an indicator of future subscription and maintenance revenue performance due to the high percentage of our revenue that is recognized from license agreements that are already committed and being recognized ratably.

"Deferred revenue (billed or collected)" is composed of: (i) amounts received from customers in advance of revenue recognition, (ii) amounts billed but not collected for which revenue has not yet been earned, and (iii) amounts received in advance of revenue recognition from financial institutions where we have transferred our interest in committed installments (referred to as "Financing obligations and other" in Note G, "Deferred Revenue," in the Notes to the Condensed Consolidated Financial Statements).

27-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following tables present revenue and expense line items reported in our Condensed Consolidated Statements of Operations for the third quarter and first nine months of fiscal 2013 and fiscal 2012 and the period-over-period dollar and percentage changes for those line items. These comparisons of past financial results are not necessarily indicative of future results.

Third Quarter Comparison Fiscal 2013 Versus Fiscal 2012 Dollar Change Percentage Change Percentage of Total Revenue 2013 2012 2013 / 2012 2013 / 2012 2013 2012 (in millions) Revenue Subscription and maintenance revenue $ 966 $ 1,006 $ (40 ) (4 )% 81 % 80 % Professional services 97 103 (6 ) (6 ) 8 8 Software fees and other 132 154 (22 ) (14 ) 11 12 Total revenue $ 1,195 $ 1,263 $ (68 ) (5 )% 100 % 100 % Expenses Costs of licensing and maintenance $ 72 $ 69 $ 3 4 % 6 % 5 % Cost of professional services 92 91 1 1 8 7 Amortization of capitalized software costs 66 59 7 12 6 5 Selling and marketing 331 342 (11 ) (3 ) 28 27 General and administrative 96 113 (17 ) (15 ) 8 9 Product development and enhancements 120 126 (6 ) (5 ) 10 10 Depreciation and amortization of other intangible assets 39 44 (5 ) (11 ) 3 3 Other (gains) expenses, net 9 6 3 50 % 1 - Total expenses before interest and income taxes $ 825 $ 850 $ (25 ) (3 )% 69 % 67 % Income from continuing operations before interest and income taxes $ 370 $ 413 $ (43 ) (10 )% 31 % 33 % Interest expense, net 12 9 3 33 1 1 Income from continuing operations before income taxes $ 358 $ 404 $ (46 ) (11 )% 30 % 32 % Income tax expense 107 141 (34 ) (24 ) 9 11 Income from continuing operations $ 251 $ 263 $ (12 ) (5 )% 21 % 21 % Note: Amounts may not add to their respective totals due to rounding.

28-------------------------------------------------------------------------------- Table of Contents First Nine Months Comparison Fiscal 2013 Versus Fiscal 2012 Dollar Change Percentage Change Percentage of Total Revenue 2013 2012 2013 / 2012 2013 / 2012 2013 2012 (in millions) Revenue Subscription and maintenance revenue $ 2,906 $ 3,035 $ (129 ) (4 )% 83 % 84 % Professional services 283 289 (6 ) (2 ) 8 8 Software fees and other 303 302 1 - 9 8 Total revenue $ 3,492 $ 3,626 $ (134 ) (4 )% 100 % 100 % Expenses Costs of licensing and maintenance $ 210 $ 207 $ 3 1 % 6 % 6 % Cost of professional services 266 270 (4 ) (1 ) 8 7 Amortization of capitalized software costs 197 164 33 20 6 5 Selling and marketing 953 1,038 (85 ) (8 ) 27 29 General and administrative 304 331 (27 ) (8 ) 9 9 Product development and enhancements 368 384 (16 ) (4 ) 11 11 Depreciation and amortization of other intangible assets 120 134 (14 ) (10 ) 3 4 Other (gains) expenses, net (14 ) 10 (24 ) NM - - Total expenses before interest and income taxes $ 2,404 $ 2,538 $ (134 ) (5 )% 69 % 70 % Income from continuing operations before interest and income taxes $ 1,088 $ 1,088 $ - - % 31 % 30 % Interest expense, net 33 24 9 38 1 1 Income from continuing operations before income taxes $ 1,055 $ 1,064 $ (9 ) (1 )% 30 % 29 % Income tax expense 342 337 5 1 10 9 Income from continuing operations $ 713 $ 727 $ (14 ) (2 )% 20 % 20 % Note: Amounts may not add to their respective totals due to rounding.

Revenue Total Revenue As more fully described below, the decrease in total revenue in the third quarter of fiscal 2013 compared with the third quarter of fiscal 2012 was primarily attributable a decrease in subscription and maintenance revenue and to a lesser extent a decrease in software fees and other revenue. For the third quarter of fiscal 2012, software fees and other revenue included $39 million in revenue under a license agreement we entered into in connection with a litigation settlement (refer to "Software Fees and Other" section below). There was also an unfavorable foreign exchange effect of $12 million for the third quarter of fiscal 2013.

The decrease in total revenue in the first nine months of fiscal 2013 compared with the first nine months of fiscal 2012 was primarily attributable to an unfavorable foreign exchange effect of $88 million and to a lesser extent, a decrease in subscription and maintenance revenue.

Due to our performance in the first six months of fiscal 2013, the macro-economic environment in which we believe customers are elongating their sales cycles, and the expectation of delaying the closing of some transactions in our pipeline until later in fiscal 2013 and after fiscal 2013, we currently expect a year-over-year decrease in total revenue for fiscal 2013 compared with fiscal 2012.

29-------------------------------------------------------------------------------- Table of Contents Subscription and Maintenance Revenue Subscription and maintenance revenue is the amount of revenue recognized ratably during the reporting period from: (i) subscription license agreements that were in effect during the period, generally including maintenance that is bundled with and not separately identifiable from software usage fees or product sales, (ii) maintenance agreements associated with providing customer technical support and access to software fixes and upgrades that are separately identifiable from software usage fees or product sales, and (iii) license agreements bundled with additional products, maintenance or professional services for which VSOE has not been established. These amounts include the sale of products directly by us, as well as by distributors and volume partners, value-added resellers and exclusive representatives to end-users, where the contracts incorporate the right for end-users to receive unspecified future software products, and other contracts entered into in close proximity or contemplation of these agreements.

The decrease in subscription and maintenance revenue in the third quarter of fiscal 2013 compared with the third quarter of fiscal 2012 was primarily attributable to a decrease in subscription and maintenance bookings from lower renewals and new product and mainframe capacity sales in prior periods and an increase in the percentage of our total bookings recognized on an up-front basis within software fees and other revenue. There was also an unfavorable foreign exchange effect of $10 million for the third quarter of fiscal 2013.

The decrease in subscription and maintenance revenue in the first nine months of fiscal 2013 compared with the first nine months of fiscal 2012 was primarily attributable to an unfavorable foreign exchange effect of $77 million. The decrease in subscription and maintenance revenue was also attributable to a decrease in subscription and maintenance bookings from lower renewals and new product and mainframe capacity sales in prior periods and an increase in the percentage of our total bookings recognized on an up-front basis within software fees and other revenue.

We expect that an increased percentage of bookings recognized as software fees and other revenue will have an unfavorable effect on future subscription and maintenance revenue.

Professional Services Professional services revenue primarily includes product implementation, consulting, customer training and customer education. Professional services revenue for the third quarter of fiscal 2013 decreased slightly compared with the third quarter of fiscal 2012 due to a lower amount of billable time on engagements during the quarter as a result of lower sales activity earlier in the year.

Professional services revenue for the first nine months of fiscal 2013 decreased slightly compared with the first nine months of fiscal 2012 due to an unfavorable foreign exchange effect of $7 million. Without the unfavorable effect of foreign exchange, professional services revenue for the first nine months of fiscal 2013 would have been consistent with the year-ago period.

Software Fees and Other Software fees and other revenue primarily consists of revenue that is recognized on an up-front basis. This includes revenue associated with enterprise solutions products sold on an up-front basis directly by our sales force or through transactions with distributors and volume partners, value-added resellers and exclusive representatives (sometimes referred to as our "indirect" or "channel" revenue). It also includes our SaaS revenue, which is recognized as the services are provided rather than up-front.

During the third quarter of fiscal 2012, we recognized $39 million in revenue under a license agreement we entered into in connection with a litigation settlement with Rocket Software, Inc. (Rocket) during fiscal 2009 that resolved our claims against Rocket for copyright infringement and trade secret misappropriation. Rocket did not admit any wrongdoing in connection with this settlement. As part of this settlement, Rocket agreed to license technology from us, including source code authored several years ago and related trade secrets that were the subject of the litigation. The amount received during the third quarter of fiscal 2012 reflects the final amount owed to us, which was not scheduled to be paid in full until fiscal 2014 (the Final License Payment).

Rocket paid this amount in advance at their discretion, unsolicited by us and without any discount or concession by us.

Software fees and other revenue decreased for the third quarter of fiscal 2013 compared with the third quarter of fiscal 2012 primarily due to the Final License Payment recognized in the third quarter of fiscal 2012. Partially offsetting this decrease was an increase of $9 million in revenue from our perpetual enterprise solutions products and $9 million in revenue from our SaaS offerings.

Software fees and other revenue was consistent for the first nine months of fiscal 2013 compared with the first nine months of fiscal 2012 primarily due to an increase of $21 million in revenue from our perpetual enterprise solutions products and $21 million in revenue from our SaaS offerings. These increases were offset by the Final License Payment recognized in the third quarter of fiscal 2012.

30-------------------------------------------------------------------------------- Table of Contents Total Revenue by Geography The following tables present the amount of revenue earned from sales to unaffiliated customers in the United States and international regions and corresponding percentage changes for the third quarter and first nine months of fiscal 2013 and the third quarter and first nine months of fiscal 2012.

Third Quarter Comparison Fiscal 2013 Versus Fiscal 2012 Dollar Percentage 2013 % 2012 % Change Change (dollars in millions) United States $ 701 59 % $ 745 59 % $ (44 ) (6 )% International 494 41 % 518 41 % (24 ) (5 )% Total Revenue $ 1,195 100 % $ 1,263 100 % $ (68 ) (5 )% First Nine Months Comparison Fiscal 2013 Versus Fiscal 2012 Dollar Percentage 2013 % 2012 % Change Change (dollars in millions) United States $ 2,068 59 % $ 2,107 58 % $ (39 ) (2 )% International 1,424 41 % 1,519 42 % (95 ) (6 )% Total Revenue $ 3,492 100 % $ 3,626 100 % $ (134 ) (4 )% Revenue in the United States decreased by $44 million, or 6%, for the third quarter of fiscal 2013 compared with the third quarter of fiscal 2012 primarily due to a decrease in subscription and maintenance revenue and a decrease in software fees and other revenue, as described above. International revenue decreased by $24 million, or 5%, for the third quarter of fiscal 2013 compared with the third quarter of fiscal 2012. The decrease was primarily due to an unfavorable foreign exchange effect of $12 million and a decrease in subscription and maintenance revenue.

Revenue in the United States decreased by $39 million, or 2%, for the first nine months of fiscal 2013 compared with the first nine months of fiscal 2012 primarily due to an a decrease in subscription and maintenance revenue, as described above. International revenue decreased by $95 million, or 6%, for the first nine months of fiscal 2013 compared with the first nine months of fiscal 2012, primarily due to an unfavorable foreign exchange effect of $88 million.

Price changes do not have a material effect on revenue in a given period as a result of our ratable subscription model.

Expenses Operating expenses for the third quarter of fiscal 2013 decreased compared with the third quarter of fiscal 2012 primarily as a result of a decrease in selling and marketing, general and administrative and product development and enhancements expenses. The decrease in operating expenses was also attributable to lower personnel costs of $5 million due in part to a change in our employee vacation benefits. These decreases were partially offset by an increase of $18 million in employee severance charges.

Operating expenses for the first nine months of fiscal 2013 decreased compared with the first nine months of fiscal 2012 due to $35 million of income from the intellectual property transaction recognized in "Other (gains) expenses, net" in the first quarter of fiscal 2013. In addition, the decrease was also attributable to a decrease in selling and marketing expenses, a favorable effect of foreign exchange on operating expenses, a decrease in general and administrative expenses, a $28 million decrease in severance costs and a decrease in $10 million due to the aforementioned change to our employee vacation benefits. We currently expect an additional $10 million of cost savings in the fourth quarter of fiscal 2013 as a result of this change to our employee vacation benefits. Partially offsetting these decreases was an increase in amortization of capitalized software costs.

Costs of Licensing and Maintenance Costs of licensing and maintenance include technical support, royalties, and other manufacturing and distribution costs. Costs of licensing and maintenance for the third quarter and first nine months of fiscal 2013 were consistent with the third quarter and first nine months of fiscal 2012.

Cost of Professional Services Cost of professional services consists primarily of our personnel-related costs associated with providing professional services and training to customers. Cost of professional services for the third quarter of fiscal 2013 was consistent with the third quarter of fiscal 2012. Operating margin for professional services decreased to 5% for the third quarter of fiscal 2013 compared to 12% for the third quarter of fiscal 2012. The decrease in operating margin for professional services was primarily attributable to the decrease in revenue for the third quarter of fiscal 2013 as described above and an increase in severance costs.

31-------------------------------------------------------------------------------- Table of Contents Cost of professional services for the first nine months of fiscal 2013 was slightly lower compared with the first nine months of fiscal 2012. Operating margin for professional services decreased slightly to 6% for the first nine months of fiscal 2013 compared to 7% in the first nine months of fiscal 2012.

Operating margin for professional services does not include certain additional costs that are allocated to the Services segment (see "Performance of Segments" below).

Amortization of Capitalized Software Costs Amortization of capitalized software costs consists of the amortization of both purchased software and internally generated capitalized software development costs. Internally generated capitalized software development costs relate to new products and significant enhancements to existing software products that have reached the technological feasibility stage.

The increase in amortization of capitalized software costs for the third quarter and first nine months of fiscal 2013 compared with the third quarter and first nine months of fiscal 2012 was primarily due to the increase in software development projects that have reached general availability in recent periods and amortization from assets acquired from our fiscal 2012 acquisitions.

We evaluate the useful lives and recoverability of capitalized software and other intangible assets when events or changes in circumstances indicate that an impairment may exist. These evaluations require complex assumptions about key factors such as future customer demand, technology trends, and the impact of such factors on the technology we acquire and develop for our products. As of December 31, 2012, no impairment exists and no revisions to useful lives are necessary within our Enterprise Solutions segment. Impairment or revisions to useful lives could result from the use of alternative assumptions which reflect reasonably possible outcomes related to future customer demand or technology trends for certain assets in the Enterprise Solutions segment whose carrying amount is approximately $75 million.

Selling and Marketing Selling and marketing expenses include the costs relating to our sales force, channel partners, corporate and business marketing and customer training programs. For the third quarter of fiscal 2013, the decrease in selling and marketing expenses compared with the third quarter of fiscal 2012 was primarily attributable to a decrease in personnel-related costs of $18 million and a decrease in promotion expense of $8 million. The decreases were partially offset by an increase in severance costs of $10 million.

For the first nine months of fiscal 2013, the decrease in selling and marketing expenses compared with the first nine months of fiscal 2012 was attributable to a decrease in commission expenses of $25 million due to lower sales in the first nine months of fiscal 2013, a favorable foreign exchange effect of $22 million, a decrease in personnel-related costs of $17 million, a decrease in severance costs of $17 million and a decrease in promotion expense of $13 million.

General and Administrative General and administrative expenses include the costs of corporate and support functions, including our executive leadership and administration groups, finance, legal, human resources, corporate communications and other costs such as provisions for doubtful accounts. For the third quarter of fiscal 2013, general and administrative expenses decreased compared with the third quarter of fiscal 2012, primarily due to a decrease in costs associated with external consultants of $12 million.

For the first nine months of fiscal 2013, general and administrative expenses decreased compared with the first nine months of fiscal 2012, primarily due to a decrease in costs associated with external consultants of $17 million and a favorable foreign exchange effect of $10 million.

Product Development and Enhancements For the third quarters of fiscal 2013 and fiscal 2012, product development and enhancements expenses represented approximately 10% of total revenue. The decrease in product development and enhancements expenses was primarily attributable to a decrease in personnel-related costs and an increase in the proportion of expenditures that were capitalized during the third quarter of fiscal 2013 compared with the third quarter of fiscal 2012. These decreases were partially offset by an increase in severance costs of $5 million.

For the first nine months of fiscal 2013 and fiscal 2012, product development and enhancements expenses represented approximately 11% of total revenue. The decrease in product development and enhancements expenses was primarily attributable to a decrease in personnel-related costs. These decreases were partially offset by a decrease in the proportion of expenditures that were capitalized during the first nine months of fiscal 2013 compared with the first nine months of fiscal 2012.

Depreciation and Amortization of Other Intangible Assets The decrease in depreciation and amortization of other intangible assets for the third quarter and first nine months of fiscal 2013 compared with the third quarter and first nine months of fiscal 2012 was primarily due to the decrease in the amount of intangible assets acquired that are subject to amortization as a result of intangible assets becoming fully amortized.

32-------------------------------------------------------------------------------- Table of Contents Other (Gains) Expenses, Net Other (gains) expenses, net includes gains and losses attributable to divested assets, foreign currency, exchange rate changes, impairment charges and other miscellaneous items. Foreign exchange derivative contracts are used to mitigate our operating risks and exposure to foreign currency exchange rates.

Other (gains) expenses, net increased $3 million for the third quarter of fiscal 2013 compared with the third quarter of fiscal 2012. The increase was primarily a result of an increase in expenses in connection with litigation claims.

Other (gains) expenses, net decreased $24 million for the first nine months of fiscal 2013 compared with the first nine months of fiscal 2012. The decrease was primarily a result of a transaction in the first quarter of fiscal 2013 to assign the rights of certain of our intellectual property assets to a technology company for $35 million as part of an effort to more fully utilize our intellectual property assets. We will continue to have the ability to use these intellectual property assets in current and future product offerings. Partially offsetting this income for the first nine months of fiscal 2013 was a $9 million loss relating to foreign exchange, of which $2 million relates to our derivative contracts hedging our forecasted cash flow exposure.

Interest Expense, Net Interest expense, net for the third quarter and first nine months of fiscal 2013 increased from the respective year-ago periods primarily due to a decrease in interest income due to lower interest rates and lower cash balances for the current periods compared with the respective year-ago periods.

Income Taxes Income tax expense for the third quarter and first nine months of fiscal 2013 was $107 million and $342 million, respectively, compared with income tax expense of $141 million and $337 million for the third quarter and first nine months of fiscal 2012, respectively. For the third quarter and first nine months of fiscal 2012, we recognized a net tax expense of approximately $10 million and a net tax benefit of approximately $8 million, respectively, resulting primarily from international tax rate changes and the recognition of tax benefits related to an investment in a foreign subsidiary. Income tax expense decreased $34 million for the third quarter of fiscal 2013 compared with the year-ago period as a result of a reduction in income before income taxes for the third quarter of fiscal 2013 compared to the year-ago period, and the timing of both favorable and unfavorable discrete items in the third quarter of fiscal 2013 compared with the third quarter of fiscal 2012.

During the third quarter of fiscal 2013, we reclassified approximately $150 million of deferred tax assets from non-current to current due to a change in tax accounting method reflected in the Company's federal income tax return for fiscal 2012. This accounting change does not affect the income tax expense.

In April 2011, the U.S. Internal Revenue Service (IRS) completed its examination of our federal income tax returns for the tax years ended March 31, 2005, 2006 and 2007 and issued a report of its findings in connection with the examination.

We disagree with certain proposed adjustments in the report and are vigorously disputing these matters through the IRS appellate process. The IRS is also examining our federal income tax returns for the tax years ended March 31, 2008, 2009 and 2010.

While it is difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our financial statements reflect the probable outcome of uncertain tax positions. We may adjust these uncertain tax positions, as well as any related interest or penalties, in light of changing facts and circumstances, including the settlement of income tax audits and the expirations of statutes of limitation. To the extent a settlement differs from the amounts previously reserved, that difference generally would be recognized as a component of income tax expense in the period of resolution.

Although the timing of the resolution of income tax examinations is highly uncertain, it is reasonably possible that settlements, payments and new information in the next 12 months related to certain federal, foreign and state tax issues may result in changes to our uncertain tax positions, including issues involving taxation of international operations, certain state tax issues and other matters. We believe that such reasonably possible changes within the next 12 months may reduce the balance of unrecognized tax benefits, net of the effects of refunds and other affirmative claims, by an amount up to $200 million.

Our effective income tax rate, excluding the impact of discrete items, for the three months ended December 31, 2012 and 2011 was 32.6% and 32.4%, respectively.

Legislative changes in tax laws, the outcome of tax audits and any other changes in potential tax liabilities may result in additional tax expense or benefit in fiscal 2013 which are not considered in our estimated annual effective tax rate.

While we do not currently view any such items as individually material to the results of our consolidated financial position or results of operations, the impact of certain items may yield additional tax expense or benefit in the remaining quarter of fiscal 2013 and we are anticipating a fiscal 2013 effective tax rate closer to the high end of a 30% to 31% range.

33-------------------------------------------------------------------------------- Table of Contents Performance of Segments Segment financial information for the third quarter and first nine months of fiscal 2013 and fiscal 2012 is as follows: Mainframe Solutions Third Quarter Third Quarter Fiscal 2013 Fiscal 2012 (dollars in millions) Revenue $ 622 $ 682 Expenses 248 277 Segment profit $ 374 $ 405 Segment operating margin 60 % 59 % First Nine Months First Nine Months Fiscal 2013 Fiscal 2012 (dollars in millions) Revenue $ 1,869 $ 1,983 Expenses 755 861 Segment profit $ 1,114 $ 1,122 Segment operating margin 60 % 57 % For the third quarter of fiscal 2013, Mainframe Solutions revenue decreased from the year-ago period primarily due to the $39 million Final License Payment received in the third quarter of fiscal 2012 and a decrease in subscription and maintenance revenue, which is attributable to a decrease in subscription and maintenance bookings due to lower new product and mainframe capacity sales in prior periods. The increase in operating margin for the third quarter of fiscal 2013 was primarily a result of a decrease in selling and marketing expenses and general and administrative expenses.

For the first nine months of fiscal 2013, Mainframe Solutions revenue decreased from the year-ago period primarily due to the $39 million Final License Payment received in the third quarter of fiscal 2012, an unfavorable foreign exchange effect of $52 million and a decrease in subscription and maintenance revenue, which is attributable to a decrease in subscription and maintenance bookings due to lower new product and mainframe capacity sales in prior periods. The increase in operating margin for the first nine months of fiscal 2013 was primarily a result of the decrease in selling and marketing expenses, a favorable effect of foreign exchange on operating expenses, a decrease in general and administrative expenses and a decrease in severance costs.

34-------------------------------------------------------------------------------- Table of Contents Enterprise Solutions Third Quarter Third Quarter Fiscal 2013 Fiscal 2012 (dollars in millions) Revenue $ 476 $ 478 Expenses 426 419 Segment profit $ 50 $ 59 Segment operating margin 11 % 12 % First Nine Months First Nine Months Fiscal 2013 Fiscal 2012 (dollars in millions) Revenue $ 1,340 $ 1,354 Expenses 1,195 1,223 Segment profit $ 145 $ 131 Segment operating margin 11 % 10 % Enterprise Solutions revenue for the third quarter of fiscal 2013 decreased compared with the year-ago period due to an unfavorable foreign exchange effect of $4 million. Within Enterprise Solutions, there was an increase in revenue from our security and ITKO products, which was mostly offset by a decrease in revenue from our service assurance, automation and data management products.

Enterprise Solutions expenses for the third quarter of fiscal 2013 increased compared with the year-ago period as a result of an increase in severance costs in the third quarter of fiscal 2013. As a result of the increase in expenses, Enterprise Solutions operating margin for the third quarter of fiscal 2013 declined from 12% to 11% compared with the year-ago period.

Enterprise Solutions revenue for the first nine months of fiscal 2013 decreased compared with the year-ago period due to an unfavorable foreign exchange effect of $29 million. Within Enterprise Solutions revenue, there was an increase in revenue attributable to our security, ITKO and Nimsoft products, partially offset by a decrease in revenue from our service assurance, automation and data management products. Operating margin for the first nine months remained consistent as a result of the income from the aforementioned $35 million intellectual property transaction in the first quarter of fiscal 2013, which contributed three percentage points to operating margin in the first nine months of fiscal 2013, as well as a decrease in severance costs for the first nine months of fiscal 2013 compared with the first nine months of fiscal 2012. These favorable items were offset by our additional investments in ITKO and Nimsoft products.

35-------------------------------------------------------------------------------- Table of Contents Services Third Quarter Third Quarter Fiscal 2013 Fiscal 2012 (dollars in millions) Revenue $ 97 $ 103 Expenses 93 92 Segment profit $ 4 $ 11 Segment operating margin 4 % 11 % First Nine Months First Nine Months Fiscal 2013 Fiscal 2012 (dollars in millions) Revenue $ 283 $ 289 Expenses 269 272 Segment profit $ 14 $ 17 Segment operating margin 5 % 6 % Services revenue for the third quarter of fiscal 2013 decreased from the third quarter of fiscal 2012 due to a lower amount of billable time on engagements during the quarter as a result of lower sales activity earlier in the year.

Operating margin for Services decreased to 4% in the third quarter of fiscal 2013 compared with 11% in the third quarter of fiscal 2012 as a result of the decrease in revenue and an increase in severance costs.

Services revenue for the first nine months of fiscal 2013 decreased slightly compared with the first nine months of fiscal 2012 due to an unfavorable foreign exchange effect of $7 million. Operating margin for Services decreased to 5% in the first nine months of fiscal 2013 compared with 6% in the first nine months of fiscal 2012 as a result of the slight reduction in revenue.

Refer to Note O, "Segment Information," in the Notes to the Condensed Consolidated Financial Statements for additional information.

Bookings Total Bookings For the third quarter of fiscal 2013 and 2012, total bookings were $1,261 million and $1,284 million, respectively. The decrease in bookings reflected a year-over-year decline in software fees and other bookings, which are recognized as software fees and other revenue. This was partially offset by an increase in professional services bookings. For the third quarter of fiscal 2012, software fees and other bookings included the $39 million Final License Payment.

Generally, quarters with smaller renewal inventories result in a lower level of bookings both because renewal bookings will be lower and, to a lesser extent, because renewals also remain an important selling opportunity for new products and mainframe capacity. Renewal bookings for the third quarter of fiscal 2013, which generally do not include new product and capacity sales and professional services arrangements, increased compared with the prior-year period primarily due to the closing of several renewals in the third quarter of fiscal 2013 that were originally expected to close during the fourth quarter of fiscal 2013.

Within renewals, an increase in enterprise solutions renewals was partially offset by a decrease in mainframe renewals.

Total bookings decreased in the United States and Latin America region. This decrease was mostly offset by an increase in bookings from the Europe, Middle East and Africa region and, to a lesser extent the Asia Pacific Japan region.

Total new product and mainframe capacity sales in the third quarter of fiscal 2013 declined by approximately 10% compared with the third quarter of fiscal 2012. Within these bookings, mainframe new product sales decreased primarily as a result of the $39 million Final License Payment received in the third quarter of fiscal 2012. Mainframe capacity sales decreased, while enterprise solutions new product sales were consistent with the prior period.

Mainframe capacity sales were negatively affected by lower mainframe renewals because renewals are an important opportunity to sell additional mainframe capacity. New product and capacity sales decreased in the United States and Latin America region. These increases were partially offset by increases in the Europe, Middle East and Africa and Asia Pacific Japan regions.

36-------------------------------------------------------------------------------- Table of Contents For the first nine months of fiscal 2013 and fiscal 2012, total bookings were $2,651 million and $3,121 million, respectively. The decrease in bookings reflected a year-over-year decline in renewals and new product and mainframe capacity sales reflected in subscription and maintenance bookings. Total bookings decreased in all regions except in the Asia Pacific Japan region.

Total new product and mainframe capacity sales in the first nine months of fiscal 2013 declined by approximately 20% compared with the first nine months of fiscal 2012. Within these bookings, new product and capacity sales decreased in all regions except in the Asia Pacific Japan region.

Mainframe new product and capacity sales were down primarily due to lower renewals in the first nine months of fiscal 2013, which were down to a greater extent in the first quarter. Enterprise solutions new product sales declined primarily due to our lower-than-expected sales of new products outside of our renewal process for the first half of fiscal 2013. Bookings performance was also negatively affected by a difficult macroeconomic environment. During the first quarter of fiscal 2013, bookings performance was unexpectedly disrupted by our efforts to align our sales force to execute our customer segmented go-to-market initiative. Although our customer segmentation initiative has taken longer than anticipated to gain traction, we continue to believe that this initiative will benefit our performance in the long-term.

Subscription and Maintenance Bookings For the third quarter of fiscal 2013 and fiscal 2012, subscription and maintenance bookings were $1,034 million and $1,035 million, respectively.

Within subscription and maintenance bookings, there was a decrease in sales of mainframe new products and capacity, which was offset by an increase in renewals. An increase in enterprise solutions renewals for the third quarter of fiscal 2013 was partially offset by a decrease in mainframe solutions renewals.

Renewals for the third quarter of fiscal 2013 were higher than expected due to several deals closing in the third quarter of fiscal 2013 that were original expected to close during the fourth quarter of fiscal 2013.

During the third quarter of fiscal 2013, we executed a total of 18 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $477 million. During the third quarter of fiscal 2012, we executed a total of 12 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $452 million. Given the shift of several renewals from the fourth quarter of fiscal 2013 to the third quarter of fiscal 2013, we now expect the value of our fiscal 2013 fourth quarter renewals to decrease mid-single digits compared with the year-ago period and we continue to expect the value of our fiscal 2013 renewals to decline by approximately 10% compared with fiscal 2012. For the third quarter of fiscal 2013, our percentage renewal yield was in the low 90's. We currently expect the value of our fiscal 2014 renewals to increase by a double-digit percentage compared with fiscal 2013, with the majority of the increase to occur in the second half of fiscal 2014.

For the first nine months of fiscal 2013 and fiscal 2012, subscription and maintenance bookings were $2,043 million and $2,484 million, respectively. The decrease in subscription and maintenance bookings was primarily attributable to lower renewals and lower new product and mainframe capacity sales reflected in subscription and maintenance bookings. Within renewals, the decrease in mainframe renewals was partially offset by an increase in enterprise solutions renewals.

Annualized subscription and maintenance bookings is an indicator that normalizes the bookings recorded in the current period to account for contract length. It is calculated by dividing the total value of all new subscription and maintenance license agreements entered into during a period by the weighted average subscription and license agreement duration in years for all such subscription and maintenance license agreements recorded during the same period.

For the third quarter of fiscal 2013, annualized subscription and maintenance bookings increased from $293 million in the prior year period to $348 million.

The weighted average subscription and maintenance license agreement duration in years decreased from 3.53 in the third quarter of fiscal 2012 to 2.97 in the third quarter of fiscal 2013. This decrease was primarily attributable to shorter durations associated with large contract renewals in the third quarter of fiscal 2013 compared with the durations of large contract renewals from the third quarter of fiscal 2012.

Although each contract is subject to terms negotiated by the respective parties, we do not currently expect the weighted average subscription and maintenance agreement duration in years to change materially from historical levels for end-user contracts.

LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalent balances are held in numerous locations throughout the world, with 64% held in our subsidiaries outside the United States at December 31, 2012. Cash and cash equivalents totaled $2,353 million at December 31, 2012, representing a decrease of $326 million from the March 31, 2012 balance of $2,679 million. The decrease in cash was primarily a result of our payment of dividends, repurchases of our common stock and the purchase of short-term investments, partially offset by an increase in net cash provided by operating activities from continuing operations, during the first nine months of fiscal 2013. During the first nine months of fiscal 2013, there was a $49 million unfavorable translation effect from foreign currency exchange rates on cash held outside the United States in currencies other than the U.S. dollar.

37-------------------------------------------------------------------------------- Table of Contents Although 64% of our cash and cash equivalents is held by foreign subsidiaries, we currently neither intend nor anticipate a need to repatriate these funds to the United States in the foreseeable future. We expect existing domestic cash, cash equivalents, and cash flows from operations to be sufficient to fund our domestic operating activities and our investing and financing activities, including, among other things, the payment of regular quarterly dividends, compliance with our debt repayment schedules, repurchases of our common stock and the funding for capital expenditures, for at least the next 12 months and for the foreseeable future thereafter. In addition, we expect existing foreign cash, cash equivalents and cash flows from foreign operations to be sufficient to fund our foreign operating activities and investing activities, including, among other things, the funding for capital expenditures, acquisitions and research and development, for at least the next 12 months and for the foreseeable future thereafter.

Sources and Uses of Cash Under our subscription and maintenance agreements, customers generally make installment payments over the term of the agreement, often with at least one payment due at contract execution, for the right to use our software products and receive product support, software fixes and new products when available. The timing and actual amounts of cash received from committed customer installment payments under any specific agreement can be affected by several factors, including the time value of money and the customer's credit rating. Often, the amount received is the result of direct negotiations with the customer when establishing pricing and payment terms. In certain instances, the customer negotiates a price for a single up-front installment payment and seeks its own internal or external financing sources. In other instances, we may assist the customer by arranging financing on the customer's behalf through a third-party financial institution. Alternatively, we may decide to transfer our rights to the future committed installment payments due under the license agreement to a third-party financial institution in exchange for a cash payment. Once transferred, the future committed installments are payable by the customer to the third-party financial institution. Whether the future committed installments have been financed directly by the customer with our assistance or by the transfer of our rights to future committed installments to a third party, these financing agreements may contain limited recourse provisions with respect to our continued performance under the license agreements. Based on our historical experience, we believe that any liability that we may incur as a result of these limited recourse provisions will be immaterial.

Amounts billed or collected as a result of a single installment for the entire contract value, or a substantial portion of the contract value, rather than being invoiced and collected over the life of the license agreement, are reflected in the liability section of our Condensed Consolidated Balance Sheets as "Deferred revenue (billed or collected)." Amounts received from either a customer or a third-party financial institution that are attributable to later years of a license agreement have a positive impact on billings and cash provided by operating activities in the current period. Accordingly, to the extent these collections are attributable to the later years of a license agreement, billings and cash provided by operating activities during the license's later years will be lower than if the payments were received over the license term. We are unable to predict with certainty the amount of cash to be collected from single installments for the entire contract value, or a substantial portion of the contract value, under new or renewed license agreements to be executed in future periods.

For the third quarter of fiscal 2013, gross receipts related to single installments for the entire contract value, or a substantial portion of the contract value, were $257 million compared with $107 million for the third quarter of fiscal 2012.

In any quarter, we may receive payments in advance of the contractually committed date on which the payments were otherwise due. In limited circumstances, we may offer discounts to customers to ensure payment in the current period of invoices that have been billed, but might not otherwise be paid until a subsequent period because of payment terms. Historically, any such discounts have not been material.

Amounts due from customers from our subscription licenses are offset by deferred revenue related to these license agreements, leaving no or minimal net carrying value on the balance sheets for such amounts. The fair value of these amounts may exceed or be less than this carrying value but cannot be practically assessed since there is no existing market for a pool of customer receivables with contractual commitments similar to those owned by us. The actual fair value may not be known until these amounts are sold, securitized or collected.

Although these customer license agreements commit the customer to payment under a fixed schedule, to the extent amounts are not yet due and payable by the customer, the agreements are considered executory in nature due to our ongoing commitment to provide maintenance and unspecified future software products as part of the agreement terms.

38-------------------------------------------------------------------------------- Table of Contents We can estimate the total amounts to be billed from committed contracts, referred to as our "billings backlog," and the total amount to be recognized as revenue from committed contracts, referred to as our "revenue backlog." The aggregate amounts of our billings backlog and trade receivables already reflected in our Condensed Consolidated Balance Sheets represent the amounts we expect to collect in the future from committed contracts.

December 31, March 31, December 31, (in millions) 2012 2012 2011 Billings backlog: Amounts to be billed - current $ 2,134 $ 2,220 $ 2,237 Amounts to be billed - noncurrent 2,163 2,623 2,723 Total billings backlog $ 4,297 $ 4,843 $ 4,960 Revenue backlog: Revenue to be recognized within the next 12 months - current $ 3,495 $ 3,714 $ 3,576 Revenue to be recognized beyond the next 12 months - noncurrent 3,993 4,759 4,508 Total revenue backlog $ 7,488 $ 8,473 $ 8,084 Deferred revenue (billed or collected) $ 3,191 $ 3,630 $ 3,124 Unearned revenue yet to be billed 4,297 4,843 4,960 Total revenue backlog $ 7,488 $ 8,473 $ 8,084 Note: Revenue backlog includes deferred subscription and maintenance, professional services and software fees and other revenue.

We can also estimate the total cash to be collected in the future from committed contracts, referred to as our "Expected future cash collections," by adding the total billings backlog to the trade accounts receivable, which represent amounts already billed but not collected, from our Condensed Consolidated Balance Sheets.

December 31, March 31, December 31, (in millions) 2012 2012 2011 Expected future cash collections: Total billings backlog $ 4,297 $ 4,843 $ 4,960 Trade accounts receivable, net 786 902 840 Total expected future cash collections $ 5,083 $ 5,745 $ 5,800 The decrease in billings backlog at December 31, 2012 compared with March 31, 2012 and December 31, 2011 was primarily driven by a decrease in total bookings in the first nine months of fiscal 2013.

The decrease in expected future cash collections at December 31, 2012 compared with March 31, 2012 and December 31, 2011 was primarily driven by a decrease in trade accounts receivable as a result of lower customer billings in the first nine months of fiscal 2013, as well as a decrease in billings backlog as described above.

The decrease in total revenue backlog at December 31, 2012 compared with March 31, 2012 and December 31, 2011 was primarily due to the decline of total bookings in the first six months of fiscal 2013 and the increase in the percentage of bookings recognized as software fees and other revenue in the first nine months of fiscal 2013, which is not included in revenue backlog at December 31, 2012.

Revenue to be recognized in the next 12 months decreased by 6% at December 31, 2012 compared with March 31, 2012. Excluding the effect of foreign exchange, revenue to be recognized in the next 12 months decreased by 5% at December 31, 2012 compared with March 31, 2012.

Revenue to be recognized in the next 12 months decreased by 2% at December 31, 2012 compared with December 31, 2011. Excluding the effect of foreign exchange, revenue to be recognized in the next 12 months decreased by 2% at December 31, 2012 compared with December 31, 2011.

39-------------------------------------------------------------------------------- Table of Contents We expect a continued decline in revenue backlog year-over-year through fiscal 2013 prior to an expected increase in our renewals in fiscal 2014. Generally, we believe that a change in the current portion of revenue backlog on a year-over-year basis is an indicator of future subscription and maintenance revenue performance due to the high percentage of our revenue that is recognized from license agreements that are already committed and being recognized ratably.

Cash Generated by Operating Activities Third Quarter of Fiscal Change 2013 2012 2013 / 2012 (in millions) Cash collections from billings(1) $ 1,342 $ 1,164 $ 178 Vendor disbursements and payroll(1) (708 ) (757 ) 49 Income tax (payments) receipts, net (40 ) (31 ) (9 ) Other disbursements, net(2) (28 ) 20 (48 ) Cash generated by continuing operating activities $ 566 $ 396 $ 170 (1) Amounts include value added taxes and sales taxes.

(2) Amounts include interest, restructuring and miscellaneous receipts and disbursements.

First Nine Months of Fiscal Change 2013 2012 2013 / 2012 (in millions) Cash collections from billings(1) $ 3,357 $ 3,404 $ (47 ) Vendor disbursements and payroll(1) (2,334 ) (2,422 ) 88 Income tax (payments) receipts, net (190 ) (252 ) 62 Other disbursements, net(2) 5 (1 ) 6 Cash generated by continuing operating activities $ 838 $ 729 $ 109 (1) Amounts include value added taxes and sales taxes.

(2) Amounts include interest, restructuring, $35 million in cash proceeds received from the aforementioned intellectual property transaction and miscellaneous receipts and disbursements.

Third Quarter Comparison Fiscal 2013 Versus Fiscal 2012 Operating Activities: Cash provided by continuing operating activities for the third quarter of fiscal 2013 was $566 million, representing an increase of $170 million compared with the third quarter of fiscal 2012. The increase was primarily due to an increase in cash collections of $178 million. This includes an increase in single installment payments of $150 million of which over $100 million was from a single customer.

Investing Activities: Cash used in investing activities for the third quarter of fiscal 2013 was $88 million compared with $60 million for the third quarter of fiscal 2012. The increase in cash used in investing activities was primarily due to an increase in cash paid for investments of $161 million, offset by an increase in cash received from investment maturities of $134 million.

40-------------------------------------------------------------------------------- Table of Contents Financing Activities: Cash used in financing activities for the third quarter of fiscal 2013 was $222 million compared with $166 million in the third quarter of fiscal 2012. The increase in cash used in financing activities was primarily due to an increase in cash dividends paid of $89 million and an increase in net repayments mainly related to our notional pooling arrangement of $89 million, partially offset by a decrease in common shares repurchased of $123 million.

First Nine Months Comparison Fiscal 2013 Versus Fiscal 2012 Operating Activities: Cash provided by continuing operating activities for the first nine months of fiscal 2013 was $838 million, representing an increase of $109 million compared with the first nine months of fiscal 2012. The increase was primarily due to a decrease in vendor disbursements and payroll of $88 million and a decrease in income tax payments of $62 million, partially offset by a decrease in cash collections of $47 million that was attributable to lower billings. For the first nine months of fiscal 2013 there was an increase in single installment payments of $203 million. For the first nine months of fiscal 2013, other disbursements, net includes $35 million in cash proceeds received as other income from the aforementioned intellectual property transaction that occurred in the first quarter of fiscal 2013. Due to our performance in the first six months of fiscal 2013, the macro-economic environment in which we believe customers are elongating their sales cycles, and the expectation of delaying the closing of some transactions in our pipeline until later in fiscal 2013 and after fiscal 2013, we currently expect lower billings and collections for fiscal 2013 compared with fiscal 2012. As a result, we expect a year-over-year decrease in cash flows from operations for fiscal 2013 compared with fiscal 2012.

Investing Activities: Cash used in investing activities for the first nine months of fiscal 2013 was $362 million compared with $560 million for the first nine months of fiscal 2012. The decrease in cash used in investing activities was primarily due to the decrease in cash paid for acquisitions of $355 million, an increase in cash received from investment sales and maturities of $64 million and a decrease in capitalized software development costs of $15 million, offset by an increase in cash paid for investments of $244 million.

Financing Activities: Cash used in financing activities for the first nine months of fiscal 2013 was $753 million compared with $747 million in the first nine months of fiscal 2012.

The increase in cash used in financing activities was primarily due to an increase in cash dividends paid of $274 million, partially offset by a decrease in common shares repurchased of $132 million and a decrease in net repayments mainly related to our notional pooling arrangement of $126 million.

Debt Obligations As of December 31, 2012 and March 31, 2012, our debt obligations consisted of the following: December 31, 2012 March 31, 2012 (in millions) Revolving credit facility due August 2016 $ - $ - 5.375% Senior Notes due November 2019 750 750 6.125% Senior Notes due December 2014, net of unamortized premium from fair value hedge of $22 and $27 522 527 Other indebtedness, primarily capital leases 34 29 Unamortized discount for Notes (5 ) (5 ) Total debt outstanding 1,301 1,301 Less the current portion (19 ) (14 ) Total long-term debt portion $ 1,282 $ 1,287 Other Indebtedness We have available an unsecured and uncommitted multi-currency line of credit to meet short-term working capital needs for our subsidiaries operating outside the United States. We use guarantees and letters of credit issued by financial institutions to guarantee performance on certain contracts. At December 31, 2012 and March 31, 2012, $50 million and $55 million, respectively, was pledged in support of bank guarantees and other local credit lines and less than $1 million of these arrangements had been drawn down by third parties.

41-------------------------------------------------------------------------------- Table of Contents We use a notional pooling arrangement with an international bank to help manage global liquidity requirements. Under this pooling arrangement, we and our participating subsidiaries may maintain either cash deposit or borrowing positions through local currency accounts with the bank, so long as the aggregate position of the global pool is a notionally calculated net cash deposit. Because it maintains a security interest in the cash deposits, and has the right to offset the cash deposits against the borrowings, the bank provides us and our participating subsidiaries favorable interest terms on both. For the first nine months of fiscal 2013, the activity under this cash pooling arrangement was as follows: (in millions) Total borrowing position outstanding at March 31, 2012 (1) $ 139 Borrowings 791 Repayments (787 ) Foreign currency exchange effect (3 ) Total borrowing position outstanding at December 31, 2012 (1) $ 140 (1) Included in "Accrued expenses and other current liabilities" in our Condensed Consolidated Balance Sheets.

For the first nine months of fiscal 2012, borrowings and repayments related to this notional pooling arrangement were approximately $240 million and $112 million, respectively, and are presented within the financing activities section of our Condensed Consolidated Statements of Cash Flows.

For additional information concerning our debt obligations, refer to our Consolidated Financial Statements and Notes thereto included in our 2012 Form 10-K.

Effect of Exchange Rate Changes There was a $49 million unfavorable impact to our cash balances in the first nine months of fiscal 2013 predominantly due to the strengthening of the U.S.

dollar against the euro (1%), the Brazilian real (11%) and the Japanese yen (4%).

There was a $96 million unfavorable impact to our cash balances in the first nine months of fiscal 2012 predominantly due to the strengthening of the U.S.

dollar against the South African rand (19%), the Indian rupee (19%), the Brazilian real (14%), the euro (9%), and the Canadian dollar (5%).

CRITICAL ACCOUNTING POLICIES AND BUSINESS PRACTICES The preparation of financial statements in accordance with generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances. Our estimates 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 the estimates may change if the underlying conditions or assumptions change.

Information with respect to our critical accounting policies that we believe could have the most significant effect on our reported results or require subjective or complex judgments by management is contained in our 2012 Form 10-K under Management's Discussion and Analysis of Financial Condition and Results of Operations. At December 31, 2012, there was no material change to this information.

New Accounting Pronouncements Recently Adopted Presentation of Comprehensive Income: In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. We adopted ASU 2011-05 effective for the first quarter of fiscal 2013 and included the required disclosures in two separate but consecutive statements.

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