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.
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, has more than doubled the company's operating margins. 
Despite the company's efforts to diversify, however, its mainframe business still represents almost half of its total operating income. 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.
In 2010, BMC generated a net income of $406.1 million on revenues of $1.91 billion. This represents a 70.6% increase in net income and a 2.1% increase in revenues from 2009, when the company earned $238.1 million on $1.87 billion in revenues.
BMC operates through two software business segments:
Approximately 43 percent of BMC's 2009 revenue was related to the mainframe market. BMC expects this segment to flat despite the growth of the IT management sector. 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.
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.
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.
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.