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WIKI ANALYSIS
BMC Software, Inc. (NYSE: BMC) sells software that helps IT departments run more efficiently by automating database and systems management tasks. These software products proactively monitor the performance and stability of computer systems and other networked devices. They also cut down on repetitive, manual tasks such as applying updates. The company makes most of its money by charging license and maintenance fees for its software products. BSM also offers consulting services to help clients implement these products although these services only amounted to 5.8% of revenue in 2007.[1]
Once focused exclusively on mainframe systems, BMC entered the distributed systems management market in the 1990s with the introduction of its Business Service Management Strategy (BSM). Distributed systems take advantage of the growth of the internet and networking by connecting a number of computers together to perform the same task. BSM approaches IT management from a business standpoint by finding the most cost-effective method of running an IT department; as many tasks as possible are automated to decrease the cost of hiring operators. BMC software not only monitors IT systems to decrease downtime but also uses predictive intelligence to help clients decide which systems are redundant or need upgrading. The shift towards BSM, combined with cost cutting measures employed over the last 3 years (2004-2007), has more than doubled the company's operating margins. [2]
Despite the company's efforts to diversify, however, its mainframe business still represented 43 percent of total revenue in 2007 and close to 50 percent of total operating income.[3] Mainframe systems are losing ground to distributed computing systems and smaller servers. The pace at which BMC is able to continue to grow BSM will determine whether or not this trend is a boon or detriment to the company in the future. The company also faces increased competition from companies such as IBM and HP. These companies are able to offer bundled hardware and software products and can also take advantage of their installed customer bases to cross-sell their software products.
Business Financials
For fiscal year 2007, 58.1% of the company's $1.6 billion revenue came from software maintenance fees.[4]. Licensing revenue from software purchases accounted for 36.1 percent of revenue and increased 8.1 percent from the previous fiscal year due to increased sales of enterprise management software that offset a slight decrease in sales of mainframe management software.[5]
BMC's financial results in fiscal 2007 improved across nearly every performance metric. Segment revenue grw by 25 percent and accounted for 40 percent of total license bookings.[6] Operating income improved to $207 million from $129 million and net earnings grew to $216 million from $102 million from 2006 to 2007.[7] Total bookings of licensing, maintenance, and professional services grew 22 percent in fourth quarter of 2007.[8]The increase in operating margins during the past few years was due the company's restructuring plan. This plan has led to a reduction in workforce, relocation of jobs to overseas locations, and changes in BMC's organization structure. Revenues from bookings generated smaller revenues in the 2007, however, due to longer contract lengths. As clients pay their fees over a longer period of time, each payment will be smaller.
Trends and Forces
BMC is Dependent on its Mainframe Business, which is Being Replaced by Distributed Computing Technologies
Approximately 43 percent of BMC's 2007 revenue was related to the mainframe market. BMC expects this segment to flat despite the growth of the IT management sector.[12] Mainframes, which are large data processing systems, are being replaced by distributed computing networks, in which different parts of a program are run simultaneously on many computers connected over a network. Revenue in BMC's mainframe division has not increased for the last couple of years. BMC also faces competition in the mainframe market with CA and Compuware (CPWR), both of which also rely on their mainframe businesses for nearly half of their revenue. BMC's focus on BSM, however, will help it transition to newer technologies.
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BMC's BSM strategy was specifically designed to take advantage of the complexity of distributed computing as companies will seek to automate as many tasks as possible. IT Departments will also rely more and more on monitoring programs such as the ones offered by BMC since technicians will not be able to monitor each individual component of the network all at once. BMC expects BSM adoption to increase globally as companies transition to distributed computing systems.[13]
Growth of Open Source Software Threatens BMC's Revenue
The growing acceptance of open-source software is both a challenge and an opportunity for BMC. The company has already incorporated some open source software into their products, thereby enhancing products without additional research and development charges. However, as open source software become more widespread, it will directly compete with BMC's proprietary software offerings. BMC acknowledges that this competition will cut into revenue and operating margins if customers turn to open-source solutions, which can often be downloaded for free.[14]
BMC Faces More Competition from Hardware Manufactures
Companies such as IBM and HP sell both hardware and IT management software. These companies have been aggressively promoting bundled offerings to their clients while BMC relies on other companies to provide the hardware to implement its software. IBM, especially, has been using its mainframe installation base to offer clients software and consulting services. Bundling also makes it costly to switch companies due to hardware and software compatibility and high training costs.
Competition
BMC faces competition from large, diversified technology companies such as IBM and HP, other IT management companies such as CA and Accenture, and niche companies such as EMC and Symantec.
- International Business Machines (IBM) - In addition to being one of the most influential and oldest technology companies, IBM is also one of the largest technology consulting companies in the world. In the last couple of years, it has refocused its business on higher-value, more profitable segments of the industry and and 77% of its sales come from it software and services divisions.[15] IBM also offers a complete set of IT products from servers and storage to application management services that BMC cannot. IBM, however, is not as specialized as BMC in helping clients realize the business potential of IT. IBM's Global Business Services, which provides IT management services, made up 18.4% of its revenue while its software division made up 20.4% of its revenue.
- Hewlett-Packard Company (HPQ) - Like IBM, HP has been expanding their software and services offerings in order to boost profit margins. HP also acquired Mercury Interactive Corporation for $4.5 billion in 2006 to increase their product offerings. Like IBM, HP bundles its software with its enterprise hardware. However, HP still earns the largest portion of its revenue from selling personal computer systems, which account for nearly a quarter of its revenue. In 2007, HP's services division only accounted for 12% of revenue while its software division only accounted for 2% of revenue.
- CA (CA) - One of the four largest IT management companies, CA competes directly with BMC in a number of markets. The company provides security, storage, and business service management products to over 99% of Fortune 1000 companies and other governmental, educational, and corporate customers. With over 1,400 software offerings, CA also has business division in both the mainframe and distributed computing sectors. Approximately 47% of CA's revenue comes from their offerings for mainframes while the rest comes from their offerings for distributed computing systems. Like BMC, CA has also been aggressively acquiring smaller companies as competition in the IT service management sector increases.
- EMC (EMC) - EMC Corporation is an enterprise storage producer, focusing on large capacity hard drive arrays and storage management software. It offers clients products for storing, securing, and managing their data, an increasingly important aspect of IT management as more and more data becomes digitized. However, it lacks the breadth of services that BMC offers to clients due to its specialization in data management.
| Comparison of CA and Its Competitors | ||||
| 2007 Revenue (in Millions US$) | Percentage Growth Over Previous Year | 2007 R&D Expenses (in Millions US$) | % Revenue Spent on R&D | |
| IBM[16] | 98,785 | 8.1% | ~6,000 | ~6% |
| HP[17] | 104,000 | 13.4% | 3,610 | 3.47% |
| C'[18] | 3,943 | 4.5% | 712 | 18% |
| EMC[19] | 13.230 | 19% | N/A | N/A |
| BMC[20] | 1,580 | 5.4% | 205.4 | 13% |
References
- ↑ BMC Annual Report 2007, Page 44
- ↑ BMC Annual Report 2007, Page 5
- ↑ BMC Annual Report 2007, Page 44
- ↑ BMC Annual Report 2007 Page 25
- ↑ BMC Annual Report 2007 Page 26
- ↑ BMC Annual Report 2007 Page 4
- ↑ BMC Annual Report 2007 Page 18
- ↑ BMC Annual Report 2007 Page 27
- ↑ MSN Money, BMC 10 Year Summary
- ↑ BMC Annual Report 2007 Page 44
- ↑ BMC Annual Report 2007 Page 47
- ↑ BMC Annual Report 2007, Page 5
- ↑ BMC Annual Report 2007, Page 4
- ↑ BMC Annual Report 2007, Page 29
- ↑ IBM Annual Report 2007, Page 8
- ↑ IBM Annual Report 2007, Page 23
- ↑ HPQ 10-K
- ↑ CA Annual Report 2007, Page 40
- ↑ [http://finance.google.com/finance?q=emc&hl=en Google Finance EMC
- ↑ BMC Annual Report 2007, Page 24
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