Mainframe Software Brings In Cash, But BMC Finds Growth In IT
Posted 1/18/2007
When Bob Beauchamp wanted a sign that BMC Software's (BMC) new strategy was working, all he had to do was look at his rivals.
BMC's competitors have started offering products similar to BMC's. Beauchamp, BMC's chief executive, told employees back in 2002 that would be a sign that the firm's new plan is working.
The plan focused on a new area called business services management. That was a way for the firm, which had been providing software to run mainframe computers, to shift away from a stagnant business into a growing one. The new initiative focused on creating software to help a company manage its entire tech system.
"It was our belief that this would be the decade that (information technology) finally got around to automating themselves," Beauchamp said. "The analogy I use is, the cobbler's children are finally going to get shoes."
Simple Idea
In the past, BMC and others aimed their efforts at making a specific device work better. The new type of system looks across the entire spectrum of a company's tech system and makes it work.
"It's a simple idea, but nobody was doing it," said Norman Young, an analyst at Morningstar. "Customers are buying into this."
If it sounds odd to automate companies' tech systems, consider what happens when a company's computer system goes out. It gets dozens of its tech people on a conference call to figure out what happened.
"That's not automation," Beauchamp said.
A Forrester Research report said 25% of all $1 billion companies will have installed this type of software by 2008. And it said business services management can help companies cut a fourth of their tech budget.
"We believe we have a very big wave that's just lifting and that we're surfing," Beauchamp said.
BMC's bookings for business services management products surged 30% in the second quarter.
After four years of feeble operating profit margin and stagnant growth, its earnings took off again last year.
So even though BMC still hasn't seen much sales growth, operating margin is getting back where it belongs.
BMC cranked out 22% margin in the second fiscal quarter, ended in September. That compares with just 9% in fiscal 2006 and worse the prior four years.
"That's not very good for a software company, especially one that's mature," Todd Weller, analyst at Stifel Nicolaus, said of the past few years' results.
But a campaign of cost-cutting and improved efficiency helped BMC improve profit, even as revenue growth has been meager. Sales grew 7% in the second quarter to $386.7 million, but just 2% last year.
Still, profit surged 42% to 37 cents per share. Analysts polled by First Call expect full-year earnings to soar 43% to $1.47 a share in fiscal 2007 and gain an additional 12% in 2008 to $1.65.
"This is really a profit-margin story," Young said.
If it can hold its margin near 20%, it'll do well, he says. It'll need it, because he doesn't expect BMC's revenue to grow more than about 6% a year over the next five years.
That's mostly because of its sales mix. It gets about one-third of sales from products that work with mainframe computers.
While that's a nice cash-flow business, it's not growing. More companies are using servers instead of giant mainframes. Morningstar's Young figures BMC's mainframe business will be flat "if they're lucky." The company has said mainframe software sales will likely be flat to down about 5% a year.
"It's going to be tough to grow revenue when one-third of your sales are coming from mainframes," Young said.
BMC has shifted from its reliance on that stagnant business. Mainframe software sales made up more than half of its sales five years ago.
Weller sees signs of revenue picking up.
"Prior to last quarter, it was a cost-cutting story," he said. "But now, last quarter we started to see some revenue growth."
He mostly credits the business services management strategy. But BMC is also gaining share, thanks to a gap in its competition.
Key rival CA, (CA) the former Computer Associates, is still trying to overcome an accounting fraud scandal and is restructuring programs it has launched.
"CA is struggling, and that leaves the door open for BMC to take advantage," Weller said.
Fierce Competition
Still, the battle for market share in the business software market is fierce. IBM (IBM) and Hewlett-Packard (HPQ) are big in the business.
"All have a pretty solid position in the market," Weller said.
Microsoft (MSFT) is starting to get into the business, too, Young says. But BMC has an edge in that it's an independent software firm, he adds. IBM and Hewlett-Packard might sell their software with their hardware in a bundle. But many companies like to have an independent provider because they run so many types of hardware.
The biggest concern is the potential of some of those big rivals making an added push in the market, Young says.
Beauchamp takes the news of rivals such as IBM and Hewlett-Packard launching similar software tools to what BMC offers as validation of his strategy.
But it also means BMC has to stay on its toes to keep up its first-mover edge.
"Things can change fairly rapidly if you believe your own press clippings," he said.
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