Software Stalwart For A Soft Economy

4/6/2009


  Recent Price
$33
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
21
  Shares (millions)
188
  Long-Term Debt as % of Capital
24%
  52-Week Price Range
$40.87 - $20.58

BMC Software ($33; BMC) enjoys a competitive edge in one of technology’s most robust markets, data centers, yet also remains a major player in mainframes.

While spending on enterprise technology is likely to fall this year, BMC expects to gain market share during the downturn. Clients’ profits may be down, but their service requirements are not. BMC attempts to help companies boost returns and/or lower costs, outcomes always in demand regardless of economic conditions. The company’s recurring revenue stream provides profit visibility and stability superior to that of most other software firms. BMC, already a Buy and a Long-Term Buy, is being added to the Focus List.

Business breakdown
BMC operates two segments. Mainframe Service Management (39% of sales in the nine months ended December) offers automated tools for database systems on mainframes. Enterprise Service Management (61% of sales), which targets nonmainframe computing, has limited exposure to the troubled financial sector and accounts for most of BMC’s growth.Combining both product segments, maintenance revenue (55% of sales) rose 6%, while licensing revenue (37% of sales) grew 13% in the nine months ended December. Revenue from professional services (8% of sales), or implementing and integrating products, increased 31%. In all, sales grew 10% in the nine-month period, though growth decelerated to 6% in the December quarter.

While mainframe sales fell 6% in the December quarter, BMC added 17 new clients, including J.B. Hunt Transport
($24; JBHT). In the December quarter, sales to new customers and to replace competitors’ products doubled relative to the September quarter.

Enterprise revenue grew 16% in the December quarter, thanks largely to the April acquisition of BladeLogic. The $800 million deal boosted BMC’s exposure to automated data centers. BMC is poised to benefit from business partner Cisco Systems’ ($17; CSCO) leap into the server market.

Bookings, or the value of new contracts signed, rose 6% in the 12 months ended December. BMC is not immune to recessionary pressures, but its recent success and decent results from competitors illustrate the resilience of its business model.

In February, BMC surprised Wall Street by raising per-share-profit guidance for fiscal 2009 ending March to $2.20 to $2.30 on higher-than-expected revenue. In fiscal 2008, BMC earned $2.00 per share. While currency losses will cut into operating cash flow, management still expects modest growth this year.

Conclusion
BMC’s recent operating momentum drives confidence in its growth outlook. The stock has surged 23% in 2009, compared to a 12% decline for the S&P 1500 Index and a 3% gain for the S&P 1500 Technology Sector Index. At 14 times estimated year-ahead earnings of $2.36 per share, BMC trades roughly in line with the average software company despite its attractive growth profile — and at a discount to historical norms. The consensus projects per-share earnings will be down 1% for the March quarter and up 8% in fiscal 2010, targets BMC may be able to top. An annual report for BMC Software Inc. is available at 2101 CityWest Blvd., Houston, TX 77042; (800) 793-4262; www.bmc.com.

BMC SOFTWARE
 
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Dec '08 $0.45 vs. $0.42 + 6% $29.48 -

$20.58

19 - 13
Sep '08 0.36 vs. 0.38 + 11% 37.37 - 27.69 24 - 18
Jun '08 0.27 vs. 0.27 + 14% 40.87 - 30.06 26 - 19
Mar '08 0.50 vs.

0.30

+ 11% 36.19 - 29.01 26 - 21
           
Year
(Mar.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $1.73 $1.57 $0.00 $37.05
-
$24.77 24 - 16
2007 $1.58 $1.03 $0.00 36.92
-
19.90 36 - 19
2006 $1.50 $0.83 $0.00 23.85
-
14.51 29 - 17
2005 $1.46 $0.37 $0.00 20.55
-
13.70 56 - 37
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
88 73 30 92 93 94 97

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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