UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-16393

 

BMC Software, Inc.

(Exact name of registrant as specified in its charter)

Delaware		74-2126120
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)
2101 CityWest Boulevard
Houston, Texas		77042-2827
(Address of principal executive offices)		(Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of January 27, 2012, there were 164,227,000 outstanding shares of Common Stock, par value $.01, of the registrant.

 

 

BMC SOFTWARE, INC.
QUARTER ENDED DECEMBER 31, 2011

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 2011 (Unaudited) and March 31, 2011			3
Condensed Consolidated Statements of Operations and Comprehensive Income for the quarters and nine months ended December 31, 2011 and 2010 (Unaudited)			4
Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2011 and 2010 (Unaudited)			5
Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures about Market Risk			35
Item 4. Controls and Procedures			36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			37
Item 1A. Risk Factors			37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 6. Exhibits			38
Signatures			39
Exhibit 10.32
Exhibit 10.33
Exhibit 10.34
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BMC SOFTWARE, INC.

		December 31,				March 31,
		2011				2011
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,319.5			$	1,660.9
Short-term investments			37.1				27.8
Trade accounts receivable, net			239.4				284.1
Trade finance receivables, net			74.2				112.6
Deferred tax assets			58.5				65.1
Other current assets			107.1				116.9
Total current assets			1,835.8				2,267.4
Property and equipment, net			84.4				94.2
Software development costs, net			230.2				193.8
Long-term investments			57.4				67.8
Long-term trade finance receivables, net			55.7				110.8
Intangible assets, net			93.4				100.9
Goodwill			1,512.8				1,407.0
Other long-term assets			218.5				243.5
Total assets		$	4,088.2			$	4,485.4
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	31.8			$	30.8
Finance payables			2.2				16.6
Accrued liabilities			248.5				316.0
Deferred revenue			1,001.9				1,026.9
Total current liabilities			1,284.4				1,390.3
Long-term deferred revenue			868.5				928.6
Long-term borrowings			325.4				335.6
Other long-term liabilities			144.6				168.0
Total liabilities			2,622.9				2,822.5
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $.01 par value, 1.0 shares authorized, none issued and outstanding			—				—
Common stock, $.01 par value, 600.0 shares authorized, 249.1 shares issued			2.5				2.5
Additional paid-in capital			1,149.6				1,077.4
Retained earnings			3,174.8				2,845.2
Accumulated other comprehensive income			15.5				32.0
			4,342.4				3,957.1
Treasury stock, at cost (84.1 and 71.9 shares)			(2,877.1	)			(2,294.2	)
Total stockholders’ equity			1,465.3				1,662.9
Total liabilities and stockholders’ equity		$	4,088.2			$	4,485.4

The accompanying notes are an integral part of these condensed consolidated financial statements.

BMC SOFTWARE, INC.

		Quarter Ended								Nine Months Ended
		December 31,								December 31,
		2011				2010				2011				2010
Revenue:
License		$	225.0			$	234.6			$	644.2			$	613.9
Maintenance			272.3				259.3				807.4				765.6
Professional services			50.9				46.0				155.7				123.6
Total revenue			548.2				539.9				1,607.3				1,503.1
Operating expenses:
Cost of license revenue			38.6				32.5				116.2				95.2
Cost of maintenance revenue			46.2				43.7				139.5				124.3
Cost of professional services revenue			52.8				54.7				153.4				132.0
Selling and marketing expenses			154.1				160.2				452.3				445.5
Research and development expenses			38.5				45.0				121.5				126.9
General and administrative expenses			50.4				56.0				160.0				163.0
Amortization of intangible assets			5.8				8.4				26.5				25.2
Total operating expenses			386.4				400.5				1,169.4				1,112.1
Operating income			161.8				139.4				437.9				391.0
Other income (loss), net:
Interest and other income, net			2.3				4.5				8.7				8.9
Interest expense			(4.5	)			(4.9	)			(15.2	)			(14.7	)
Gain (loss) on investments, net			(1.3	)			2.1				(3.4	)			2.3
Total other income (loss), net			(3.5	)			1.7				(9.9	)			(3.5	)
Earnings before income taxes			158.3				141.1				428.0				387.5
Provision for income taxes			38.4				32.0				97.7				53.8
Net earnings		$	119.9			$	109.1			$	330.3			$	333.7
Basic earnings per share		$	0.72			$	0.61			$	1.92			$	1.87
Diluted earnings per share		$	0.71			$	0.60			$	1.88			$	1.83
Shares used in computing basic earnings per share			167.2				178.2				172.0				178.7
Shares used in computing diluted earnings per share			169.5				182.3				175.2				182.2
Net earnings		$	119.9			$	109.1			$	330.3			$	333.7
Other comprehensive income (net of tax):
Foreign currency translation adjustment			17.4				5.9				(15.9	)			12.6
Unrealized gain (loss) on available-for-sale securities			0.3				1.3				(0.6	)			1.3
Total other comprehensive income (loss)			17.7				7.2				(16.5	)			13.9
Total comprehensive income		$	137.6			$	116.3			$	313.8			$	347.6

The accompanying notes are an integral part of these condensed consolidated financial statements.

BMC SOFTWARE, INC.

		Nine Months Ended
		December 31,
		2011				2010
Cash flows from operating activities:
Net earnings		$	330.3			$	333.7
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			161.6				140.1
Deferred income tax provision (benefit)			(2.5	)			22.6
Share-based compensation expense			92.7				76.3
Loss (gain) on investments, net and other			2.4				(2.3	)
Changes in operating assets and liabilities, net of acquisitions:
Trade accounts receivable			47.1				(107.3	)
Trade finance receivables			91.9				103.8
Prepaid and other current assets			6.3				(6.0	)
Other long-term assets			17.8				(1.2	)
Accrued and other current liabilities			(47.8	)			(20.4	)
Deferred revenue			(88.6	)			(13.6	)
Other long-term liabilities			(9.1	)			(37.2	)
Other operating assets and liabilities			(14.7	)			(13.7	)
Net cash provided by operating activities			587.4				474.8
Cash flows from investing activities:
Proceeds from maturities of investments			24.8				50.0
Proceeds from sales of investments			4.4				34.0
Purchases of investments			(30.0	)			(8.2	)
Cash paid for acquisitions, net of cash acquired			(163.0	)			(51.0	)
Capitalization of software development costs			(97.7	)			(88.6	)
Purchases of property and equipment			(17.6	)			(18.4	)
Other investing activities			—				1.0
Net cash used in investing activities			(279.1	)			(81.2	)
Cash flows from financing activities:
Treasury stock acquired			(630.5	)			(299.0	)
Repurchases of stock to satisfy employee tax withholding obligations			(31.7	)			(19.1	)
Proceeds from stock options exercised and other			41.9				101.3
Excess tax benefit from share-based compensation expense			13.6				13.2
Repayments of borrowings and capital lease obligations			(20.7	)			(20.6	)
Proceeds from borrowings, net of issuance costs			—				(1.9	)
Net cash used in financing activities			(627.4	)			(226.1	)
Effect of exchange rate changes on cash and cash equivalents			(22.3	)			8.0
Net change in cash and cash equivalents			(341.4	)			175.5
Cash and cash equivalents, beginning of period			1,660.9				1,368.6
Cash and cash equivalents, end of period		$	1,319.5			$	1,544.1
Supplemental disclosure of cash flow information:
Cash paid for interest		$	22.7			$	22.7
Cash paid for income taxes, net of amounts refunded		$	20.8			$	50.3

The accompanying notes are an integral part of these condensed consolidated financial statements.

BMC SOFTWARE, INC.

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of BMC Software, Inc. and its subsidiaries (collectively, we, us, our or BMC). All significant intercompany balances and transactions have been eliminated in consolidation. These financial statements reflect all normal recurring adjustments necessary to fairly present our financial position and results of operations as of and for the periods presented herein. These financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Certain reclassifications have been made to the prior period’s financial statements to conform to the current period’s presentation.

Interim results are not necessarily indicative of results for a full year. Our results reflect the seasonality of our business and generally tend to be stronger in the third and fourth quarters of our fiscal year, as compared to the first and second quarters of our fiscal year; however, general economic conditions also have an impact on our business and financial results. These financial statements should be read in conjunction with our annual audited consolidated financial statements for the fiscal year ended March 31, 2011, as filed with the SEC on Form 10-K.

Adjustments Recorded in Current Period

During the quarter ended December 31, 2011, we corrected the accounting for the foreign currency impacts of certain intangible assets and related deferred taxes associated with a fiscal 2000 business combination. The correction of these errors had the effect in the current quarter of decreasing intangible asset amortization expense by $4.5 million, increasing the provision for income taxes by $3.2 million and increasing the foreign currency translation adjustment (a component of other comprehensive income) by $29.2 million, resulting in increases to net earnings and comprehensive income of $1.3 million and $30.5 million, respectively.

We do not consider the impact of these corrections, which relate to financial statement periods dating back to fiscal 2000 (errors impacting net earnings primarily related to fiscal 2003 and prior periods), to be material to any prior fiscal year presented in our most recent Annual Report on Form 10-K for the fiscal year ended March 31, 2011 or to the current fiscal year.

Recently Adopted Accounting Pronouncements

In December 2010 and in September 2011, the Financial Accounting Standards Board (FASB) issued updated guidance relating to the annual goodwill impairment test. This new guidance incorporates additional qualitative assessments at two discrete points in the goodwill impairment evaluation. First, entities are now permitted to perform an initial qualitative assessment of whether it is more likely than not that goodwill is impaired in order to determine the need to perform the previously required two-step impairment test. This new guidance has been early adopted by us and will be applied for our fiscal 2012 annual goodwill impairment test. Additionally, as part of step one of the two-step impairment test, entities are required to perform a qualitative assessment of whether it is more likely than not that goodwill is impaired in situations where reporting units have a carrying value that is zero or negative. If the qualitative evaluation determines that it is more likely than not that goodwill is impaired, step two of the goodwill impairment test is required to be performed to determine the amount of impairment, if any. This guidance is effective for us beginning with our fiscal 2012 goodwill impairment test. Neither set of guidance is expected to have a material effect on our financial position, results of operations or cash flows.

In October 2009, the FASB issued new revenue recognition guidance for arrangements that include both software and non-software related deliverables. This guidance requires entities to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence (VSOE) or other third party evidence of the selling price. Additionally, the guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. The new guidance was effective for us in the first quarter of fiscal 2012 and did not have a material effect on our financial position, results of operations or cash flows.

(2) Business Combinations

In April 2011, we acquired all of the outstanding shares of Coradiant Inc. (Coradiant), a global provider of end-to-end performance management of web applications, for total cash consideration of $130.0 million. Coradiant’s operating results have been included in our condensed consolidated financial statements since the acquisition date. This acquisition expands BMC’s current application performance management offering to provide real-time insight into application performance and its impact on user behavior across enterprise, software-as-a-service (SaaS) and cloud environments. The purchase consideration was allocated to acquired assets and assumed liabilities consisting primarily of $18.1 million of acquired technology and $22.7 million of customer relationships, both with a weighted average economic life of three years, in addition to other tangible assets and liabilities. This acquisition resulted in a preliminary allocation of $93.2 million to goodwill assigned to our Enterprise Service Management (ESM) segment. Factors that contributed to a purchase price that resulted in goodwill include, but are not limited to, the retention of research and development personnel with the skills to develop future Coradiant technology, support personnel to provide maintenance services related to Coradiant products and a trained sales force capable of selling current and future Coradiant products and the opportunity to cross-sell our products and Coradiant products to existing customers.

In June 2011, we also completed the acquisitions of Aeroprise, Inc., a provider of mobile IT service management solutions, as part of our ESM segment, and Neon Enterprise Software, LLC’s portfolio of IMS solution software as part of our Mainframe Service Management (MSM) segment, for combined purchase consideration of $21.0 million. The purchase consideration was allocated to acquired assets and assumed liabilities consisting primarily of $11.2 million of acquired technology, with weighted average economic lives of approximately three years, in addition to other tangible assets and liabilities. These acquisitions resulted in an allocation of $7.7 million to goodwill assigned to our ESM segment and $6.0 million assigned to our MSM segment.

In December 2011, we completed the acquisition of I/O Concepts Software Corporation, a provider of mainframe management and security solutions, for total purchase consideration of $14.1 million. The purchase consideration was preliminarily allocated to acquired assets and assumed liabilities consisting primarily of $8.3 million of acquired technology, with a weighted average economic life of approximately three years, in addition to other tangible assets and liabilities. This acquisition resulted in a preliminary allocation of $9.2 million to goodwill assigned to our MSM segment.

We are in the process of finalizing our assessment of the fair value of certain acquired assets and assumed liabilities for the above acquisitions and will adjust the purchase price allocations when finalized.

(3) Financial Instruments

We measure certain financial instruments at fair value on a recurring basis using the following valuation techniques:

(A) Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

(B) Income approach — Uses valuation techniques to convert future estimated cash flows to a single present amount based on current market expectations about those future amounts, using present value techniques.

The fair values of our financial instruments were determined using the following input levels and valuation techniques:

		Fair Value Measurements at Reporting Date Using
						Quoted Prices in Active								Significant
						Markets for Identical				Significant Other				Unobservable
						Assets				Observable Inputs				Inputs				Valuation
December 31, 2011		Total				(Level 1)				(Level 2)				(Level 3)				Technique
		(In millions)
Assets
Cash equivalents
Money-market funds		$	357.1			$	357.1			$	—			$	—			A
Certificates of deposit			55.5				55.5				—				—			A
Short-term and long-term investments
United States Treasury securities			50.0				50.0				—				—			A
Auction rate securities			25.9				—				—				25.9			B
Mutual funds			18.6				18.6				—				—			A
Foreign currency forward contracts			4.9				—				4.9				—			A
Total		$	512.0			$	481.2			$	4.9			$	25.9
Liabilities
Foreign currency forward contracts		$	2.1			$	—			$	2.1			$	—			A
Total		$	2.1			$	—			$	2.1			$	—

Level 1 classification is applied to any asset or liability that has a readily available quoted market price from an active market where there is significant transparency in the executed/quoted price.

Level 2 classification is applied to assets and liabilities that have evaluated prices where the data inputs to these valuations are observable either directly or indirectly, but do not represent quoted market prices from an active market.

Level 3 classification is applied to assets and liabilities when prices are not derived from existing market data and requires us to develop our own assumptions about how market participants would value the asset or liability.

The following tables summarize the activity in Level 3 financial instruments for the quarters and nine months ended December 31, 2011 and 2010, respectively:

		Quarter Ended												Nine Months Ended
		December 31, 2011												December 31, 2011
		Auction												Auction
		Rate				Put								Rate				Put
		Securities				Option				Total				Securities				Option				Total
		(In millions)
Balance at the beginning of the period		$	25.6			$	—			$	25.6			$	27.2			$	—			$	27.2
Redemption of auction rate securities			(0.1	)			—				(0.1	)			(0.5	)			—				(0.5	)
Change in unrealized gain (loss) included in other comprehensive income			0.4				—				0.4				(0.8	)			—				(0.8	)
Balance at the end of the period		$	25.9			$	—			$	25.9			$	25.9			$	—			$	25.9

		Quarter Ended												Nine Months Ended
		December 31, 2010												December 31, 2010
		Auction												Auction
		Rate				Put								Rate				Put
		Securities				Option				Total				Securities				Option				Total
		(In millions)
Balance at the beginning of the period		$	33.9			$	—			$	33.9			$	60.5			$	1.1			$	61.6
Redemption of auction rate securities			(0.1	)			—				(0.1	)			(27.6	)			—				(27.6	)
Change in unrealized gain (loss) included in interest and other income, net			—				—				—				1.1				(1.1	)			—
Change in unrealized gain included in other comprehensive income			1.6				—				1.6				1.4				—				1.4
Balance at the end of the period		$	35.4			$	—			$	35.4			$	35.4			$	—			$	35.4

Investments

Our cash, cash equivalents and investments were comprised of the following:

		December 31, 2011												March 31, 2011
		Cash and												Cash and
		Cash				Short-term				Long-term				Cash				Short-term				Long-term
		Equivalents				Investments				Investments				Equivalents				Investments				Investments
		(In millions)
Measured at fair value:
Available-for-sale
United States Treasury securities		$	—			$	37.1			$	12.9			$	525.0			$	27.8			$	22.1
Certificates of deposit			55.5				—				—				38.4				—				—
Auction rate securities			—				—				25.9				—				—				27.2
Trading
Mutual funds			—				—				18.6				—				—				18.5
Total debt and equity investments measured at fair value			55.5				37.1				57.4				563.4				27.8				67.8
Cash on hand			906.9				—				—				412.8				—				—
Money-market funds			357.1				—				—				684.7				—				—
Total cash, cash equivalents and investments		$	1,319.5			$	37.1			$	57.4			$	1,660.9			$	27.8			$	67.8
Amounts included in accumulated other comprehensive income from available-for-sale securities (pre-tax):
Unrealized losses*		$	—			$	—			$	3.4			$	—			$	—			$	2.6

The following summarizes the underlying contractual maturities of our available-for-sale investments in debt securities at December 31, 2011:

						Fair
		Cost				Value
		(In millions)
Due in one year or less		$	92.6			$	92.6
Due between one and two years			12.9				12.9
Due after ten years			29.3				25.9
Total		$	134.8			$	131.4

At December 31, 2011 and March 31, 2011, we held auction rate securities with a par value of $29.3 million and $29.8 million, respectively, which were classified as available-for-sale. The total estimated fair value of our auction rate securities was $25.9 million and $27.2 million at December 31, 2011 and March 31, 2011, 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 are 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 and the put option discussed below using internally developed models of the expected cash flows of the securities which incorporate assumptions about the expected cash flows of the underlying student loans and estimates 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. During the quarter and nine months ended December 31, 2011, issuers redeemed available-for-sale holdings of $0.1 million and $0.5 million, respectively. During the quarter and nine months ended December 31, 2010, issuers redeemed available-for-sale holdings of $0.1 million and $11.0 million, respectively, and trading holdings of $5.4 million during the nine months ended December 31, 2010.

In November 2008, we entered into a put agreement with a bank from which we acquired certain auction rate securities. On July 1, 2010, we exercised our right under this agreement to put the remaining securities subject to this agreement, with $11.2 million par value, to the bank. The auction rate securities subject to the put were classified as short-term investments and trading securities and, accordingly, any changes in the fair value of these securities were recognized in earnings. In addition, we elected the option under GAAP to record the put option at fair value. The fair value adjustments to these auction rate securities and the related put option, prior to the exercise of the put on July 1, 2010, resulted in minimal net impact to the condensed consolidated statement of operations for the quarter and nine months ended December 31, 2010.

The unrealized loss on our available-for-sale auction rate securities, which have a fair value of $25.9 million at December 31, 2011, was $3.4 million and was recorded in accumulated other comprehensive income (loss) as we believe the decline in fair value of these auction rate securities is temporary. In making this determination, we primarily considered the financial condition and near-term prospects of the issuers, the probability scheduled cash flows will continue to be made and the likelihood we would be required to sell the investments before recovery of our cost basis. These available-for-sale auction rate securities have been in an unrealized loss position for greater than twelve months. Because of the uncertainty related to the timing of liquidity associated with these auction rate securities, these securities are classified as long-term investments at December 31, 2011 and March 31, 2011.

Derivative Financial Instruments

We operate globally and transact business in various foreign currencies. Our foreign currency exposures relate primarily to certain foreign currency denominated assets and liabilities, primarily non-U.S. dollar denominated accounts receivable, cash and intercompany balances held by U.S. dollar functional currency entities. To minimize the risk from changes in foreign currency exchange rates, we have established a program that utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. Gains or losses on our foreign currency exposures are offset by gains or losses on the foreign currency forward contracts entered into under this program. These foreign currency forward contracts generally have terms of one month or less and are generally entered into at the prevailing market exchange rate at the end of each month. We do not use forward contracts for speculative purposes. While these foreign currency forward contracts are utilized to hedge foreign currency exposures, they are not formally designated as hedges, and therefore, the changes in the fair values of these derivatives are recognized currently in earnings. We record these foreign currency forward contracts at fair value as either assets or liabilities depending on their net settlement position with each respective counterparty at the balance sheet date.

The fair value of our outstanding foreign currency forward contracts that closed in a gain position at December 31, 2011 and March 31, 2011 was $4.9 million and $5.8 million, respectively, and was recorded within other current assets in our condensed consolidated balance sheets. The fair value of our outstanding foreign currency forward contracts that closed in a loss position at December 31, 2011 and March 31, 2011 was $2.1 million and $3.3 million, respectively, and was recorded within accrued liabilities in our condensed consolidated balance sheets. The notional amounts at contract exchange rates of our foreign currency forward contracts outstanding were:

		Notional Amount
		December 31,				March 31,
		2011				2011
		(In millions)
Foreign Currency Forward Contracts (receive United States dollar/pay foreign currency)
Euro		$	186.0			$	158.5
British pound			33.6				5.0
Australian dollar			19.9				13.9
Chinese yuan renminbi			11.1				7.6
Swedish krona			6.5				2.4
Norwegian krone			5.5				2.0
Swiss franc			5.4				1.5
Brazilian real			5.3				5.6
New Zealand dollar			5.2				2.9
Danish krone			4.3				3.0
Singapore dollar			3.0				0.6
South Korean won			2.8				4.6
Canadian dollar			—				4.2
Other			3.8				1.2
Total		$	292.4			$	213.0
Foreign Currency Forward Contracts (pay United States dollar/receive foreign currency)
Israeli shekel		$	138.0			$	151.6
Indian rupee			13.3				9.1
Canadian dollar			4.7				—
Mexican peso			—				9.3
Other			0.6				2.2
Total		$	156.6			$	172.2

Our use of foreign currency forward exchange contracts is intended to principally offset gains and losses associated with foreign currency exposures. Therefore, the notional amounts and currencies underlying our foreign currency forward contracts will fluctuate period to period as they are principally dependent on the balances and currency denomination of monetary assets and liabilities maintained by our global entities. The effect of the foreign currency forward contracts for the quarter and nine months ended December 31, 2011, was a loss of $1.7 million and $7.6 million, respectively, which, after including gains and losses on our foreign currency exposures, resulted in net losses of $0.6 million and $2.5 million, respectively, recorded in interest and other income, net. The effect of the foreign currency forward contracts for the quarter and nine months ended December 31, 2010, was a gain of $4.7 million and $11.0 million, respectively, which, after including gains and losses on our foreign currency exposures, resulted in a net gain of $0.6 million and a net loss of $2.0 million, respectively, recorded in interest and other income, net.

We are exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments, but we do not expect any counterparties to fail to meet their obligations given their high credit ratings. In addition, we diversify this risk across several counterparties and utilize netting agreements to mitigate the counterparty credit risk.

Trade Finance Receivables

A substantial portion of our trade finance receivables are transferred to financial institutions on a non-recourse basis. We utilize wholly-owned finance subsidiaries in these finance receivables transfers. These entities are consolidated into our financial position and results of operations. We account for such transfers as sales in accordance with applicable accounting rules pertaining to the transfer of financial assets and the sale of future revenue when we have surrendered control of such receivables (including determining that such assets have been isolated beyond our reach and the reach of our creditors) and when we do not have significant continuing involvement in the generation of cash flows due the financial institutions. During the quarter and nine months ended December 31, 2011, we transferred $49.0 million and $208.0 million, respectively, of such receivables through these programs. During the quarter and nine months ended December 31, 2010, we transferred $43.4 million and $172.3 million, respectively, of such receivables through these programs. Finance receivables are typically transferred within several months after origination and the outstanding principal balance at the time of transfer typically approximates fair value.

For those finance receivables not transferred, we evaluate the credit risk of finance receivables in our portfolio based on regional characteristics specific to the risk climate in each of our geographic operations as well as based on internal credit quality indicators for individual receivables. We evaluate the credit risk of finance receivables using an internal credit rating system based on whether an individual receivable meets specific internal criteria including counterparty credit rating and receivable maturity date and assign an internal credit rating of 1, 2 or 3, with a credit rating of 1 representing the best credit quality.

For all regions and credit categories, a finance receivable will be specifically reserved once deemed uncollectible. As of December 31, 2011, we held $129.9 million of finance receivables, net of $0.3 million of specific receivables which have been fully reserved.

At December 31, 2011, our finance receivables balance, net of allowance, by region and by class of internal credit rating is as follows:

		North America				EMEA				Asia Pacific				Latin America				Total
		(In millions)
Class 1		$	56.0			$	18.6			$	10.0			$	—			$	84.6
Class 2			18.1				19.1				4.9				1.2				43.3
Class 3			0.1				0.3				0.7				0.9				2.0
Balance at the end of the period		$	74.2			$	38.0			$	15.6			$	2.1			$	129.9

Other Financial Instruments

The fair value of our senior unsecured notes due 2018 at December 31, 2011 and March 31, 2011, based on market prices, was $353.0 million and $348.9 million, respectively, compared to the carrying value of $298.9 million and $298.7 million, respectively.

The carrying values of all other financial instruments, consisting primarily of trade and finance receivables, accounts payable and other borrowings, approximate their respective fair values.

(4) Long-Term Borrowings

Long-term borrowings at December 31, 2011 and March 31, 2011 consisted of:

		December 31,				March 31,
		2011				2011
		(In millions)
Senior unsecured notes due 2018 (net of $1.1 million and $1.3 million of unamortized discount at December 31, 2011 and March 31, 2011, respectively)		$	298.9			$	298.7
Capital leases and other obligations			47.6				56.2
Total			346.5				354.9
Less current maturities of capital leases and other obligations (included in accrued liabilities)			(21.1	)			(19.3	)
Long-term borrowings		$	325.4			$	335.6

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 BMC’s senior unsecured notes due 2018 (the Senior Notes), or (ii) the LIBOR rate (as defined) plus a margin based on the credit ratings of BMC’s Senior Notes, for interest periods of one, two, three or six months. As of December 31, 2011 and through February 1, 2012, we have not borrowed any funds under the Credit Facility.

At December 31, 2011, we were in compliance with all debt covenants.

(5) Income Taxes

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. Income tax expense was $32.0 million and $53.8 million for the quarter and nine months ended December 31, 2010, respectively, resulting in effective tax rates of 22.7% and 13.9%, 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, 2011, the overall favorable effects of foreign tax rates on our effective tax rate were 7.3% and 8.6% of pre-tax earnings, respectively. During the quarter and nine months ended December 31, 2010, the overall favorable effects of foreign tax rates on our effective tax rate were 10.9% and 11.7% of pre-tax earnings, respectively. During the nine months ended December 31, 2011 and 2010, we also recorded discrete net tax benefits of $6.2 million and $32.0 million, respectively, associated with tax authority settlements related to prior years’ tax matters which favorably impacted our effective tax rate by 1.4% and 8.3% of pre-tax earnings, respectively. Our effective tax rate could fluctuate on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in countries with lower statutory rates and higher than anticipated in countries with higher statutory rates.

We file a federal income tax return in the United States as well as income tax returns in various local, state and foreign jurisdictions. Our tax years are closed with the United States Internal Revenue Service (IRS) through the tax year ended March 31, 2007 except for one issue related to the year ended March 31, 2006. We received a Notice of Deficiency from the IRS related to this issue and in July 2011 filed a petition for hearing with the U.S. Tax Court. A trial date has been scheduled for May 2012. The IRS has initiated an examination of our federal income tax returns for the years ended March 31, 2009 and 2010. In addition, certain tax years related to local, state and foreign jurisdictions remain subject to examination. To provide for potential tax exposures, we maintain a liability for unrecognized tax benefits which we believe is adequate.

(6) Share-Based Compensation

During the quarter ended December 31, 2011, we granted 1.7 million and 0.2 million time-based nonvested stock units and market-based nonvested stock units, respectively, at a weighted average grant date fair value of $36.02 and $32.19, respectively, to our executive officers, non-executive employees and non-employee board members. During the nine months ended December 31, 2011, we granted 3.1 million and 0.4 million time-based nonvested stock units and market-based nonvested stock units, respectively, at a weighted average grant date fair value of $43.58 and $42.23, respectively, to our executive officers, non-executive employees and non-employee board members. Time-based nonvested stock units vest in annual increments over one or three years. Market-based nonvested stock units vest in 50% increments over two- and three-year periods upon achievement of certain targets related to our relative shareholder return as compared to the NASDAQ-100 Index over each performance period.

During the quarter and nine months ended December 31, 2011, we issued 0.3 million and 1.3 million shares of common stock, respectively, related to exercises of stock options and 0.7 million and 2.2 million shares of common stock, respectively, related to vesting of restricted stock units.

At December 31, 2011, we had approximately $237.5 million of total unrecognized compensation costs related to share-based awards that are expected to be recognized as expense over a remaining weighted-average period of two years.

Share-based compensation expense as recorded in our condensed consolidated statements of operations is summarized as follows:

		Quarter Ended								Nine Months Ended
		December 31,								December 31,
		2011				2010				2011				2010
		(In millions)
Cost of license revenue		$	1.1			$	0.9			$	3.4			$	2.4
Cost of maintenance revenue			3.7				2.5				11.0				7.0
Cost of professional services revenue			1.4				1.3				3.9				3.5
Selling and marketing expenses			9.3				8.2				28.4				25.7
Research and development expenses			3.1				2.3				9.6				7.1
General and administrative expenses			12.5				10.1				36.4				30.6
Total share-based compensation expense		$	31.1			$	25.3			$	92.7			$	76.3

(7) Stockholders’ Equity

Earnings Per Share

The two-class method is utilized for the computation of earnings per share (EPS). The two-class method requires a portion of net income to be allocated to participating securities, which are unvested awards of share-based payments with non-forfeitable rights to receive dividends or dividend equivalents, if declared. Income allocated to these participating securities is excluded from net earnings allocated to common shares, as shown in the table below.

Basic earnings per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options and other dilutive securities using the treasury stock method.

The following table summarizes our basic and diluted EPS computations for the quarters and nine months ended December 31, 2011 and 2010:

		Quarter Ended								Nine Months Ended
		December 31,								December 31,
		2011				2010				2011				2010
		(In millions, except per share data)
Basic earnings per share:
Net earnings		$	119.9			$	109.1			$	330.3			$	333.7
Less earnings allocated to participating securities			—				(0.1	)			—				(0.3	)
Net earnings allocated to common shares		$	119.9			$	109.0			$	330.3			$	333.4
Weighted average number of common shares outstanding			167.2				178.2				172.0				178.7
Basic earnings per share		$	0.72			$	0.61			$	1.92			$	1.87
Diluted earnings per share:
Net earnings		$	119.9			$	109.1			$	330.3			$	333.7
Less earnings allocated to participating securities			—				(0.1	)			—				(0.3	)
Net earnings allocated to common shares		$	119.9			$	109.0			$	330.3			$	333.4
Weighted average number of common shares outstanding			167.2				178.2				172.0				178.7
Incremental shares from assumed conversions of share-based awards			2.3				4.1				3.2				3.5
Adjusted weighted average number of common shares outstanding			169.5				182.3				175.2				182.2
Diluted earnings per share		$	0.71			$	0.60			$	1.88			$	1.83

For the quarter and nine months ended December 31, 2011, 4.9 million and 1.8 million weighted average potential common shares, respectively, have been excluded from the calculation of diluted EPS as they were anti-dilutive. For the quarter and nine months ended December 31, 2010, 0.4 million and 3.2 million weighted average potential common shares, respectively, have been excluded from the calculation of diluted EPS as they were anti-dilutive.

Treasury Stock

Our Board of Directors had previously authorized a total of $4.0 billion to repurchase common stock. In October 2011, our Board of Directors authorized an additional $1.0 billion to repurchase stock. During the quarter and nine months ended December 31, 2011, we repurchased 6.3 million and 15.1 million shares, respectively, for $225.0 million and $630.5 million, respectively, under the stock repurchase program. At December 31, 2011, approximately $1.0 billion remains authorized in the stock repurchase program, which does not have an expiration date. In addition, during the quarter and nine months ended December 31, 2011, we repurchased 0.2 million and 0.6 million shares, respectively, for $8.7 million and $31.7 million, respectively, to satisfy employee tax withholding obligations upon the vesting of share-based awards.

(8) Guarantees and Contingencies

Guarantees

Under our standard software license agreements, we agree to indemnify, defend and hold harmless our licensees from and against certain losses, damages and costs arising from claims alleging the licensees’ use of our software infringes the intellectual property rights of a third party. Also, under these standard license agreements, we represent and warrant to licensees that our software products operate substantially in accordance with published specifications.

Other guarantees include promises to indemnify, defend and hold harmless each of our executive officers, non-employee directors and certain key employees from and against losses, damages and costs incurred by each such individual in administrative, legal or investigative proceedings arising from alleged wrongdoing by the individual while acting in good faith within the scope of his or her job duties on our behalf.

We also had outstanding letters of credit, performance bonds and similar instruments at December 31, 2011 of approximately $31.6 million primarily in support of performance obligations to various customers, but also related to facilities and other obligations.

Historically, we have not incurred significant costs related to such indemnifications, warranties and guarantees. As such, and based on other factors, no provision or accrual for these items has been made.

Contingencies

We previously disclosed a lawsuit filed against a number of software companies, including us, by Uniloc USA, Inc. and Uniloc Singapore Private Limited in the United States District Court for the Eastern District of Texas, Tyler Division. The complaint sought monetary damages in unspecified amounts and permanent injunction based upon claims for alleged patent infringement. On September 30, 2011, we entered into a Settlement and License Agreement with various Uniloc parties completely settling and dismissing the lawsuit and granting us a permanent license to the intellectual property at issue.

We are party to various labor claims brought by certain former international employees alleging that amounts are due to such employees for unpaid commissions and other compensation. The claims are in various stages and are not expected to be fully resolved in the near future; however, we intend to vigorously contest all of the claims. Taking into account accruals recorded by us, we believe the likelihood of a material adverse effect on our financial statements resulting from these claims is remote. However, we cannot predict the timing or ultimate outcome of these matters.

We are currently litigating a matter in Brazilian courts as to whether a tax applies to the remittance of software payments from our Brazilian operations. In February 2007, a law was enacted that clarified that this particular tax did not apply to the remittance of software payments, retroactive to January 1, 2006. We continue to pursue a favorable resolution on this matter for years prior to January 1, 2006. While we believe we will ultimately prevail based on the merits of our position, if we do not, we could incur a charge of up to approximately $13 million based on current exchange rates; however, we cannot predict the timing or ultimate outcome of this matter.

We are subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Taking into account accruals recorded by us, we believe the likelihood of a material adverse effect on our financial statements resulting from any of these matters is remote.

(9) Segment Reporting

We are organized into two business segments, Enterprise Service Management (ESM) and Mainframe Service Management (MSM). The ESM segment derives its revenue from our service support, service assurance and service automation solutions, along with professional services revenue derived from consulting, implementation, integration and educational services related to our software products. The MSM segment derives its revenue from products for mainframe database management, monitoring and automation, middleware management, enterprise scheduling and output management solutions.

Segment performance is measured based on segment operating income, reflecting segment revenue less direct and allocated indirect segment operating expenses. Direct segment operating expenses primarily include cost of revenue, selling and marketing, research and development and general and administrative expenses that can be specifically identified to a particular segment and are directly controllable by segment management, while allocated indirect segment operating expenses primarily include indirect costs within these operating expense categories that are not specifically identified to a particular segment or controllable by segment management. The indirect operating expenses are allocated to the segments based on budgeted bookings, revenue and other allocation methods that management believes to be reasonable. Our measure of segment operating income does not include the effect of share-based compensation expenses, amortization of acquired technology and other intangible assets or the costs associated with severance, exit costs and related charges, which are collectively included in unallocated operating expenses below. Assets and liabilities are reviewed by management at the consolidated level only.

The following tables summarize segment performance for the quarters and nine months ended December 31, 2011 and 2010:

		Enterprise				Mainframe
		Service				Service
Quarter Ended December 31, 2011		Management				Management				Consolidated
		(In millions)
Revenue:
License		$	133.7			$	91.3			$	225.0
Maintenance			147.7				124.6				272.3
Professional services			50.9				—				50.9
Total revenue			332.3				215.9				548.2
Direct and allocated indirect segment operating expenses:			256.1				79.4				335.5
Segment operating income			76.2				136.5				212.7
Unallocated operating expenses											(50.9	)
Other loss, net											(3.5	)
Earnings before income taxes										$	158.3

		Enterprise				Mainframe
		Service				Service
Quarter Ended December 31, 2010		Management				Management				Consolidated
		(In millions)
Revenue:
License		$	148.9			$	85.7			$	234.6
Maintenance			139.9				119.4				259.3
Professional services			46.0				—				46.0
Total revenue			334.8				205.1				539.9
Direct and allocated indirect segment operating expenses:			263.2				89.2				352.4
Segment operating income			71.6				115.9				187.5
Unallocated operating expenses											(48.1	)
Other income, net											1.7
Earnings before income taxes										$	141.1

		Enterprise				Mainframe
		Service				Service
Nine Months Ended December 31, 2011		Management				Management				Consolidated
		(In millions)
Revenue:
License		$	398.2			$	246.0			$	644.2
Maintenance			434.5				372.9				807.4
Professional services			155.7				—				155.7
Total revenue			988.4				618.9				1,607.3
Direct and allocated indirect segment operating expenses:			763.8				243.9				1,007.7
Segment operating income			224.6				375.0				599.6
Unallocated operating expenses											(161.7	)
Other loss, net											(9.9	)
Earnings before income taxes										$	428.0

		Enterprise				Mainframe
		Service				Service
Nine Months Ended December 31, 2010		Management				Management				Consolidated
		(In millions)
Revenue:
License		$	393.4			$	220.5			$	613.9
Maintenance			413.4				352.2				765.6
Professional services			123.6				—				123.6
Total revenue			930.4				572.7				1,503.1
Direct and allocated indirect segment operating expenses:			717.0				250.4				967.4
Segment operating income			213.4				322.3				535.7
Unallocated operating expenses											(144.7	)
Other loss, net											(3.5	)
Earnings before income taxes										$	387.5

(10) New Accounting Pronouncements Not Yet Adopted

In May 2011, the FASB issued updated guidance for fair value measurements, primarily clarifying existing guidance and adding new disclosure requirements for Level 3 fair value measurements. This guidance requires entities to disclose quantitative information about the significant unobservable inputs used in Level 3 measurements, and to provide additional qualitative information regarding the valuation process in place for Level 3 measurements and the sensitivity of recurring Level 3 fair value measurements to changes in unobservable inputs used. This new guidance is effective for us beginning with our fourth quarter of fiscal 2012 and is not expected to have a material effect on our financial position, results of operations or cash flows.

In December 2011, the FASB 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.

(11) Subsequent Event

In January 2012, we announced our pending acquisition of Numara Software Holdings, Inc. (Numara), a leading global provider of integrated IT management solutions for mid-market companies. Subject to completion, we will acquire Numara for cash consideration of approximately $300 million. The completion of the acquisition is subject to customary closing conditions.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2011, 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, 2011.

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, 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, 2011, 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.

Overview

For the quarter and nine months ended December 31, 2011, our financial performance was solid across most of our core financial metrics. However, year over year ESM license bookings declined in both the quarter and nine month periods and were below our original expectations; refer to the additional discussion regarding ESM license bookings below. Select operating metrics for the quarter and nine months ended December 31, 2011 include:

	•		Total bookings, which represent the contract value of new transactions that we closed and recorded, were $524.4 million for the quarter, representing a decrease of $69.7 million, or 11.7%, from the prior year quarter, and for the nine months ended December 31, 2011 were $1,522.2 million, representing an increase of $32.4 million, or 2.2%, over the prior year period. Within the first nine months of fiscal 2012, one large transaction generated total bookings of over $100 million, principally related to our MSM business.
	•		Total license bookings were $236.8 million for the quarter, representing a decrease of $58.3 million, or 19.8%, from the prior year quarter, and for the nine months ended December 31, 2011 were $616.8 million, representing a decrease of $34.2 million, or 5.3%, from the prior year period. During the quarter, we closed 42 transactions with license bookings over $1 million (with total license bookings of $117.7 million) compared to 44 transactions with license bookings over $1 million (with total license bookings of $153.4 million) in the prior year quarter. During the nine months ended December 31, 2011, we closed 110 transactions with license bookings over $1 million (with total license bookings of $336.2 million) compared to 106 transactions with license bookings over $1 million (with total license bookings of $352.0 million) in the prior year period.
	•		Within our ESM segment, where we believe performance is best evaluated on the basis of license bookings, total license bookings for the quarter decreased by $37.1 million, or 22.7%, from the prior year quarter, and for the nine months ended December 31, 2011 decreased by $55.9 million, or 13.7%, from the prior year period. We attribute these decreases principally to sales-related execution, including a decline in productive sales capacity caused by sales force attrition as well as a decrease in productivity associated with a reduction in average sales force tenure and experience levels. ESM license bookings in the current year have also been adversely impacted by challenging economic and financial conditions in key geographic areas and market segments, particularly within certain European regions and the U.S. public sector.
	•		Within our MSM segment, where we believe performance is best evaluated based on total and annualized bookings over a trailing twelve months basis, total bookings for the trailing twelve months ended December 31, 2011 increased by $169.0 million, or 22.2%, and on an annualized basis, after normalizing for contract length, increased by $27.1 million, or 10.2%, as compared to the prior year period.
	•		Total revenue for the quarter was $548.2 million, representing an increase of $8.3 million, or 1.5%, over the prior year quarter, and for the nine months ended December 31, 2011 was $1,607.3 million, representing an increase of $104.2 million, or 6.9%, over the prior year period. The increase for the quarter was reflective of maintenance and professional services revenue increases of $13.0 million, or 5.0%, and $4.9 million, or 10.7%, respectively, offset by a license revenue decrease of $9.6 million, or 4.1%. The increase for the nine months ended December 31, 2011 was reflective of license, maintenance and professional services revenue increases of $30.3 million, or 4.9%, $41.8 million, or 5.5%, and $32.1 million, or 26.0%, respectively. On a segment basis, total ESM revenue for the quarter decreased by $2.5 million, or 0.7%, and total MSM revenue increased by $10.8 million, or 5.3%, as compared to the prior year quarter, and for the nine months ended December 31, 2011, total ESM revenue increased by $58.0 million, or 6.2%, and total MSM revenue increased by $46.2 million, or 8.1%, over the prior year period.
	•		Operating income for the quarter was $161.8 million, representing an increase of $22.4 million, or 16.1%, over the prior year quarter, and for the nine months ended December 31, 2011 was $437.9 million, representing an increase of $46.9 million, or 12.0%, over the prior year period. Non-GAAP operating income for the quarter was $212.7 million, representing an increase of $25.2 million, or 13.4%, over the prior year quarter, and for the nine months ended December 31, 2011 was $599.6 million, representing an increase of $63.9 million, or 11.9%, over the prior year period.
	•		Net earnings for the quarter were $119.9 million, representing an increase of $10.8 million, or 9.9%, over the prior year quarter, and for the nine months ended December 31, 2011 were $330.3 million, representing a decrease of $3.4 million, or 1.0%, from the prior year period. The decrease for the nine months ended December 31, 2011 was due to discrete tax benefits recorded by us in the prior year period in connection with tax authority settlements. Non-GAAP net earnings for the quarter were $156.9 million, representing an increase of $13.7 million, or 9.6%, over the prior year quarter, and for the nine months ended December 31, 2011 were $439.6 million, representing an increase of $34.7 million, or 8.6%, over the prior year period.

	•		Diluted earnings per share for the quarter was $0.71, representing an increase of $0.11 per share, or 18.3%, over the prior year quarter, and for the nine months ended December 31, 2011 was $1.88, representing an increase of $0.05 per share, or 2.7%, over the prior year period. Non-GAAP diluted earnings per share was $0.93, representing an increase of $0.14 per share, or 17.7%, over the prior year quarter, and for the nine months ended December 31, 2011 was $2.51, representing an increase of $0.29 per share, or 13.1%, over the prior year period.
	•		Cash flows from operations for the nine months ended December 31, 2011 were $587.4 million, representing an increase of $112.6 million, or 23.7%, over the prior year period. We closed out the quarter with a strong balance sheet at December 31, 2011, including $1.4 billion in cash, cash equivalents and investments and $1.9 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 several strategic acquisitions across both our ESM and MSM segments during the nine months ended December 31, 2011. In our ESM segment, we acquired Coradiant Inc., Aeroprise, Inc. and StreamStep, Inc. In our MSM segment, we completed the purchase of Neon Enterprise Software, LLC’s IMS software portfolio and I/O Concepts Software Corporation. Additionally, in January 2012, we also announced our pending acquisition of Numara Software Holdings, Inc., a leader in service management solutions for mid-market companies. This acquisition within our ESM segment complements our on-premise and SaaS offerings, expanding our IT management solutions to small and mid-market businesses.

We also continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. During the quarter and nine months ended December 31, 2011, we repurchased 6.3 million and 15.1 million shares, respectively, for a total value of $225.0 million and $630.5 million, respectively. In October 2011, our Board of Directors authorized an additional $1.0 billion to repurchase stock.

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.

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 operations and 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,
		2011				2010				2011				2010
Revenue:
License			41.0	%			43.5	%			40.1	%			40.9	%
Maintenance			49.7	%			48.0	%			50.2	%			50.9	%
Professional services			9.3	%			8.5	%			9.7	%			8.2	%
Total revenue			100.0	%			100.0	%			100.0	%			100.0	%
Operating expenses:
Cost of license revenue			7.0	%			6.0	%			7.2	%			6.3	%
Cost of maintenance revenue			8.4	%			8.1	%			8.7	%			8.3	%
Cost of professional services revenue			9.6	%			10.1	%			9.5	%			8.8	%
Selling and marketing expenses			28.1	%			29.7	%			28.1	%			29.6	%
Research and development expenses			7.0	%			8.3	%			7.6	%			8.4	%
General and administrative expenses			9.2	%			10.4	%			10.0	%			10.8	%
Amortization of intangible assets			1.1	%			1.6	%			1.6	%			1.7	%
Total operating expenses			70.5	%			74.2	%			72.8	%			74.0	%
Operating income			29.5	%			25.8	%			27.2	%			26.0	%
Other income (loss), net			(0.6	)%			0.3	%			(0.6	)%			(0.2	)%
Earnings before income taxes			28.9	%			26.1	%			26.6	%			25.8	%
Provision for income taxes			7.0	%			5.9	%			6.1	%			3.6	%
Net earnings			21.9	%			20.2	%			20.5	%			22.2	%

Revenue

The following table provides information regarding software license and software maintenance revenue for the quarters and nine months ended December 31, 2011 and 2010:

		Quarter Ended												Nine Months Ended
		December 31,												December 31,
Software License Revenue		2011				2010				% Change				2011				2010				% Change
		(In millions)												(In millions)
Enterprise Service Management		$	133.7			$	148.9				(10.2	)%		$	398.2			$	393.4				1.2	%
Mainframe Service Management			91.3				85.7				6.5	%			246.0				220.5				11.6	%
Total software license revenue		$	225.0			$	234.6				(4.1	)%		$	644.2			$	613.9				4.9	%