BMC Inc.
Group Members: Liefeng (Richard), ZhangWenjie (Emma) Zhang, Ya Zuo, Yuwei Hong
November 15, 2011
Introduction
• BMC Software, one of the S&P 500 companies, develops and markets
software that provides system and service management solutions for
enterprises in the United States and internationally.
• Industry：Business Analytics & Enterprise Software
• Two segments
Enterprise Service Management (ESM)
Mainframe Service Management (MSM)
• The company was founded in 1980 and is based in Houston.
Screening Criteria
I. Client base
1. High switching costs lead to a loyal client base.
2. Large and diversified client base
II. Cloud computing
Software-as-a-service solutions
III. Financial Health
1. $1.7 billion in cash and equivalents and $300 million in long-term debt.
2. FCF has hovered around the mid-20% of revenue during the past five years.
3. Key ratios.
Data source: BMC Annual Report 2011 p55
Screening Criteria
28.5
30
35
25
30
20
25
15
14.6
15
13.8
10
4
5
3.8
3.4
3
2
20.5
15
14
10.7
10
7.5
12.1
13.8
9.4
5
1.3
0
0
Price/Earnings
Price/Book
BMC
Price/Sales
Ind Avg
Price/Cash Flow
35
16.8
15
S&P 500
20
16.1
14.1
Ind Avg
25
20.5
20
Net Margin %
29.6
30
25.8
25
ROE %
BMC
29.5
30
ROA %
S&P 500
35
10
24.2
20
8.8
7.2
29.5
12.1
14
15
12.28
10
6.1 5.8
5
0.2
0
Rev Growth EPS Growth Operating
(3 Yr Avg) (3 Yr Avg) Margin %
TTM
BMC
Data source: Morning Star
Net Margin
% TTM
Ind Avg
1.8
ROE TTM Debt/Equity
5
1.51
2.08
0.55
0.99
2.65
1.28
0
Current
Assets/Current
Liability
EBITDA/Interest
BMC
Debt/EBITDA
Ind Avg
Cashflow Ops/Total
Debt
Portfolio Analysis
WFR
Semiconductor Integrated Circuits
2.75%
WAG
Drug Stores
15.71%
ABT
Drug Manufactures
10.43%
AEO
Apparel Stores
19.74%
MOS
Specialty Chemicals
11.05%
MCD
Restaurants
18.12%
JKHY
Business Software &
Services
12.82%
DO
Oil & Gas Drilling &
Exploration
9.38%
Macroeconomic review
Total Revenues
2,500.0
2,000.0
1,063.1
1,500.0
980.0
1,011.5
891.9
899.7
878.8
794.4
823.5
1,000.0
500.0
704.0
756.9
852.8
1,002.2
0
2006
2007
2008
International
Data source: BMC Annual Report 2011 p30
2009
United States
2010
2011
Market Risk
GDP
14,000,000.00mm
12,000,000.00mm
10,000,000.00mm
8,000,000.00mm
6,000,000.00mm
4,000,000.00mm
2,000,000.00mm
0.00
United States of America - GDP - Real - Forecast (Quarterly)
Japan - GDP - Real - Forecast (Quarterly)
United Kingdom - GDP - Real - Forecast (Quarterly)
Germany - GDP - Real - Forecast (Quarterly)
France - GDP - Real - Forecast (Quarterly)
Data source: Capital IQ
Market Risk
Unemployment
11.00%
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
United States of America - Unemployment Rate (Monthly)
Japan - Unemployment Rate (Monthly)
France - Unemployment Rate (Monthly)
Germany - Unemployment Rate (Monthly)
United Kingdom - Unemployment Rate (Monthly)
Data source: Capital IQ
Foreign Currency Exchange Rate Risk
Foreign Exchange
150.00%
140.00%
130.00%
120.00%
110.00%
100.00%
90.00%
80.00%
70.00%
60.00%
50.00%
Euro ($EURUSD) - Rate Value
Data source: Capital IQ
Japanese Yen ($JPYUSD) - Rate Value
British Pound ($GBPUSD) - Rate Value
Relevant Stock Market Prospects
80
57.15
60
49.0250.95
40
20
10.16
19.1215.79
2.33 4.91
26.46
10.68
26.54
17.56
15.06
3.1 5.49
2.97 1.3
0
-20
2005
2006
2007
2008
2009
-24.49
-40
-60
Data source: Capital IQ
Software - Application
YTD
-26.26
-37.35 -37
BMC
2010
S&P 500 TR
Historic growth
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
BMC Software Inc. (NasdaqGS:BMC) - Share Pricing
NASDAQ Composite Index (^COMP) - Index Value
Data source: Capital IQ
S&P 500 Index (^SPX) - Index Value
Current Stock Performance
1. BMC's relatively small sales force has left the company.
Solution: management increased the sales force by 20% in fiscal 2011 and
was on track to expand the sales head count by a similar 20% this fiscal year.
2. Under the current macroeconomic environment, some clients are
delaying deals.
Solution:
•Total MSM bookings for the past 12 months increased 25%
•Cloud management and SaaS transactions continued to show positive
momentum.
•Professional services revenue grew 35 percent from the year-ago period
Industry Analysis
Current Industry Performance
•From 2006 to 2011, revenue grew at a 5.2% average annualized rate to $27.3
billion.
•In 2011, revenue is expected to increase 10.7%, as large firms continue to
invest in their IT infrastructure and software systems rather than expanding
into current macroeconomic climate.
Forecasted Growth
•The industry revenue is expected to increase at an average annualized rate
of 3.3% to $32.1 billion during the five years to 2016.
•Industry profit is expected to increase to about 33.1% of revenue during the
next five years as the market for enterprise software grows and costs remain
flat.
Data source: IBIS World Nov 2011 p6&7&8
Porter Five Forces Analysis
• Medium Threat of Substitutes
– The growth of the cloud computing movement
• Low Barriers to Entry
– No regulations to prevent, high switching costs for clients
• Medium Industry Rivalry
– Highly competitive industry, larger competitors with more resources
• Medium Power of Buyers
– Clients are resistant to change due to switching costs
• Low Power of Suppliers
– Medium concentration in the industry, and competition is increasing
Major Companies
• CA Technologies
Market share: 10.9%
• HP
Market share: 5.1%
• IBM
Data source: IBIS World Nov 2011 p22
Cloud Computing
New Trend: Clients were more inclined to spend on SaaS to manage their
customer relationships and improve profitability and also spent more on
cloud computing.
Cloud computing, which enables firms to access applications and data
hosted elsewhere, usually at reduced costs, will eat into this industry’s
revenue, particularly as smaller businesses prefer to offload the
responsibility of owning and operating their computing needs onto the cloud
provider, as well as reduce the cost associated with IT investment.
Data source: IBIS World Nov 2011 p7
Business Service Management
Source Official Website: http://www.bmc.com/solutions/bsm/business-servicemanagement.html
BSM
Source: Novell Video http://www.youtube.com/watch?v=br4IA32fqzs
BSM
Source: Novell Video http://www.youtube.com/watch?v=br4IA32fqzs
Values/Business
Optimize IT Cost
• How do you get most out of every person, asset, or project
and make better resource allocation and sourcing decisions?
Demonstrate
Transparency
• How do you track cost and activities in your organization and
share that with stakeholders?
Increase Business
Value
• How do you ensure IT investment and operational divisions
are aligned with business priorities?
Manage Risk
Assure Quality of
Service
• How do you define and control risk in a dynamic, rapidly
changing organization and IT environment?
• How do you meet performance goals across physical, virtual,
and cloud-based resources?
Initiatives
› Cloud Computing
› Data Center Automation
› IT Cost Transparency
› IT Decision Support Automation
› IT Governance, Risk, and
Compliance
› IT Service Management
› Mainframe Cost Optimization
› Proactive Operations
Graph: http://www.bmc.com/solutions/bsm/business-servicemanagement.html
New Focus
› Cloud Computing
› BMC has created alliances with large IT providers, betting on the
upside potential of cloud and virtualization initiatives of its partners
› We think the firm is well positioned to capitalize on the impending
corporate adoption of virtualization and cloud computing
Photo: http://thecustomizewindows.com/2011/08/cloud-computing-future-of-technologyis-ahead/
Solution and Product
Enterprise Service Management (ESM) :
• Service Assurance
• Service Automation
• Service Support
• BMC Atrium
Mainframe Service Management (MSM):
•Data and Performance Management
•Enterprise Workload Automation
Revenue Breakdown
2011 Revenue
8.60%
License
41.90%
49.60%
Maintenance
Professional Services
Revenue Streams/Revenue Recognition
› License
› Perpetual License--our customers receive the perpetual license right
to use our software, and related maintenance and support services
are generally purchased on an annual basis
› Term License
Software Company Revenue Recognition Process under GAAP
› Under the residual method, consideration is allocated to undelivered
elements based upon the fair value of those elements, with the
residual of the arrangement fee allocated to and recognized as
license revenue.
› Fair value of professional services is established based on daily rates
when sold on a stand-alone basis, as well as management approved
pricing for certain new professional services offerings.
Competitive Advantages
› High switching costs make it inconvenient for organizations and difficult for
rivals to displace the firm's modular tools.
› In particular, we believe that BMC's Atrium--a platform of integrated ITMS
solutions--has played an essential role in setting the company apart from
other point-tool vendors. The company is well positioned to capitalize on
the advent of virtualization and cloud computing in the near term.
› While virtualization and cloud computing will play an important role in
BMC's future growth, the mature and highly profitable mainframe segment
(which accounts for 40% of revenue) will buttress BMC's profitability in the
near term.
› BMC's advantage rests on its ability to provide a complete and integrated
set of ITMS solutions to manage its clients' heterogeneous IT infrastructure.
Customers
Source: BMC Official website: http://www.bmc.com/customers/success
Customers
› Serves more than 80 countries in the world
› Our solutions are used by some of the largest, most demanding IT
organizations in the world including approximately 15,000 companies
and 90% of the Fortune 100.
› Most significant customers include banks and financial service
providers, government agencies and other service providers.
› Remaining customer base includes manufacturers,
telecommunication companies, educational institutions, retailers,
distributors, hospitals and other industries, as well as channel
partners including resellers, distributors and systems integrators.
International Presence
In 2011, 48.5% revenue comes from overseas
Screenshot from: Annual Report 2011
Geographic
› All foreign currency forward contracts entered into by us are
components of hedging programs and are entered into for the sole
purpose of hedging an existing exposure, not for speculation or
trading purposes.
Screenshot from: Annual Report 2011
Business Strategy -- Acquisition
Fiscal 2011 Acquisitions
›During fiscal 2011, we completed the acquisition of the software business of
Neptuny S.r.l., a leading provider of continuous capacity optimization software, and
the acquisition of GridApp Systems, a leading provider of comprehensive database
provisioning, patching and administration software, for combined purchase
consideration of $51.5 million.
Fiscal 2010 Acquisitions
›During fiscal 2010, we completed the acquisitions of MQSoftware, a leading provider
of middleware and enterprise application transaction management software, Tideway
Systems, a leading provider of IT discovery solutions, and Phurnace Software, a
leading developer of software that automates the deployment and configuration of
business-critical Java™ EE applications, for combined purchase consideration of
$94.3 million.
Fiscal 2009 Acquisition
›In April 2008, we acquired BladeLogic, a leading provider of data center automation
software, through the successful completion of a tender offer for approximately
$834 million in cash, excluding acquisition costs. The BladeLogic acquisition
expands our offerings for server provisioning, application release management, as
well as configuration automation and compliance.
Business Strategy -- Partnership
› Salesforce.com : Remedyforce IT Help Des
› Cisco CSCO has equipped its Unified Computing System products
with BMC's BladeLogic solution.
SWOT Analysis--Strength
› Strong financials, in particular in BSM-related sales.
› Historically, BMC is the No. 1 in application management; it is now
emerging as a leader in ITSM/service desk and BSM.
› Demonstrating the ability to successfully integrate acquired
technology with organically built, in-house technological innovations.
› Strong growth in professional services as a reflection of the
underlying demand for the company's enterprise service
management products.
› Delivers an integrated solution for the entire enterprise, incorporating
mainframe and distributed systems
SWOT Analysis--Weakness
› Reliant on partner relationships to deliver professional services
› BMC's relatively small salesforce has left the company
underrepresented in some competitive deals against IBM, HewlettPackard HP, and CA Technologies.
SWOT Analysis--Opportunities
› Demand for the company's mainframe service management products
continues to benefit from the ongoing mainframe refresh cycle
› Become a strategic vendor for enterprise customers.
› Become the preferred solution vendor for service providers.
› Deliver integrated data center optimization solutions combining
change and configuration management with capacity management
and provisioning.
› Management of new technology stacks — virtualized infrastructure
and SOA.
SWOT Analysis--Threats
› In light of the current macroeconomic environment, particularly when
some clients are delaying deals
› Competitors, such as IBM Tivoli, start to erode historical strongholds
like the mainframe.
› Limited focus in network management. BMC needs either a
partnership or an acquisition to be a credible, long-term player.
Leverage Ratio
› High Operating Leverage
› Low Financial Leverage
General and administrative expenses
Research and development expenses
2011
2010
Selling and marketing expenses
2009
Variable Cost
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
Financial Performance
Revenue
Revenue in millions $
2500
2000
1500
1000
91.8
918.8
500
116.3
967.7
144.4
129.1
1017.8
1023.7
176.6
8.55%
1024.2
49.59%
41.86%
569.8
647.6
709.7
758.4
864.5
03-2007
03-2008
03-2009
Fiscal Year Ending
03-2010
03-2011
0
Total software license revenue
Total professional services revenue
Data source: BMC Annual Report 2011&2008 p.27
Total software maintenance revenue
Revenue Growth
For the Fiscal Period Ending
in millions dollars
Software License Revenue
Enterprise Service Management
Growth rate %
Mainframe Service Management
Growth rate %
Total software license revenue
Growth rate %
Software Maintenance Revenue
Enterprise Service Management
Growth rate %
Mainframe Service Management
Growth rate %
Total software maintenance revenue
Growth rate %
Professional services:
Domestic
Growth rate %
International
Growth rate %
Total professional services revenue
Growth rate %
Data source: Annual Report 2011&2008 p.27
03-2007
03-2008
03-2009
03-2010
03-2011
330.1
350.5
6.18%
297.10
23.95%
647.60
13.65%
434.9
24.08%
274.8
-7.51%
709.70
9.59%
462.2
6.28%
296.2
7.79%
758.40
6.86%
550.9
19.19%
313.6
5.87%
864.50
13.99%
Median
517.4
8.22%
450.3
2.18%
967.7
5.32%
547.3
5.78%
470.5
4.49%
1017.8
5.18%
550.9
0.66%
472.8
0.49%
1023.7
0.58%
551.5
0.11%
472.7
-0.02%
1024.2
0.05%
Slow
47.1
28.69%
69.2
25.36%
116.3
26.69%
62.8
33.33%
81.6
17.92%
144.4
24.16%
59.8
-4.78%
69.3
-15.07%
129.1
-10.60%
85.9
43.65%
90.7
30.88%
176.6
36.79%
High
239.70
569.80
478.1
440.7
918.8
36.6
55.2
91.8
Ratios Analysis
For the Fiscal Period Ending
Profitability
Return on Assets %
Return on Equity %
Margin Analysis
Gross Margin %
SG&A Margin %
EBIT Margin %
Net Income Margin %
Asset Turnover
Total Asset Turnover
Fixed Asset Turnover
Accounts Receivable Turnover
Short Term Liquidity
Current Ratio
Quick Ratio
Long Term Solvency
Total Liability/Equity
LT Debt/Equity
Total Liabilities/Total Assets
EBIT / Interest Exp.
EBITDA / Interest Exp.
Cash Flow
OCF growth rate
OCF/Sales
OCF/Net Income
03-2007
03-2008
03-2009
03-2010
03-2011
6.62%
20.58%
9.37%
31.53%
6.44%
22.71%
9.81%
29.26%
10.17%
27.43%
76.57%
43.79%
13.12%
13.66%
77.22%
46.77%
20.65%
18.11%
77.30%
48.37%
19.65%
12.72%
78.48%
49.38%
26.48%
21.25%
76.58%
47.14%
25.80%
22.09%
0.48
1.07
5.00
0.52
1.15
5.83
0.53
1.02
5.90
0.49
0.87
5.79
0.48
0.93
5.21
1.45
0.97
1.40
1.23
1.17
1.01
1.42
1.26
1.63
1.48
2.11
0.00
0.68
138.20
245.40
2.36
0.00
0.70
325.00
463.27
2.53
0.30
0.72
21.64
32.39
1.98
0.25
0.66
23.76
32.01
1.70
0.20
0.63
26.91
36.51
26.58%
194.58%
41.32%
34.29%
189.32%
-2.36%
30.97%
243.47%
9.61%
33.25%
156.46%
20.43%
37.05%
167.73%
Data source: BMC Annual Report 2011&2008 p.55-58
DuPont Analysis
Period Ended
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
2007
71.82%
145.01%
13.12%
48.48%
310.74%
20.58%
2008
72.19%
121.51%
20.65%
51.76%
336.40%
31.53%
Data source: BMC Annual Report 2011&2008 p.55-58
2009
65.43%
98.94%
19.65%
50.63%
352.65%
22.71%
2010
80.54%
99.62%
26.48%
46.19%
298.16%
29.26%
2011
85.86%
99.72%
25.80%
46.04%
269.73%
27.43%
Latest Financial Performance
› Key performance indicators in Fiscal 2012 Second Quarter Report
– Total bookings for the first half year were up 11 percent to $998 million.
– For the first half, total license bookings rose 7 percent to $380 million.
– Total MSM bookings for the trailing twelve months increased 25 percent to $939
million, compared to the year-ago quarter.
– During the second quarter, there were 20 ESM license transactions above $1 million.
– Cloud management and SaaS transactions continued to show positive momentum.
– Professional services revenue grew 35 percent from the year-ago period and
delivered a non-GAAP gross margin of 8 percent.
– Non-GAAP operating margin was 39 percent, up one percentage point from the yearago quarter.
– The Company's balance sheet remains strong, with $1.6 billion in cash and
investments and $1.9 billion in deferred revenue.
Source: BMC Fiscal 2012 Second Quarter Report p.2-5
Financial Projection
› Manager’s fiscal 2012 estimations in Fiscal 2012 Second Quarter
Report
–
–
–
–
–
–
–
–
Total bookings growth in the low-double digits;
Revenue growth in the low-double digits;
MSM total bookings growth in the high single digits;
License bookings ratable rate similar to the prior year;
Operating margin staying flat with the prior year;
Other income at a loss of approximately $10 million for the year;
Weighted shares outstanding approximately 4 percent lower than fiscal 2011;
A non-GAAP tax rate of 26 percent for the year.
Source: BMC Fiscal 2012 Second Quarter Report p.2-5
DCF Valuation
For the Fiscal Period Ending
Net Income
Add D&A
Capex
Chg in Working Capital
Forecast
03-2012
338.08
172.88
26.63
201.91
03-2013
354.66
190.13
32.49
98.24
03-2014
412.41
198.87
38.28
84.81
03-2015
417.34
200.70
36.42
94.32
03-2016
478.94
206.30
39.74
132.31
FCF
686.24
610.55
657.81
675.94
777.81
Discount Factor
PV
Enterprise Value
03-2017
477.44
209.81
36.94
132.76
03-2018
496.63
218.05
32.95
69.66
783.07
751.40
Terminal Value:
0.886121 0.78520961 0.69579 0.616554 0.546341 0.484124 0.428992
608.0916 479.406271 457.6972 416.753 424.9492 379.1033 322.3458
6516.608
03-2019
574.06
223.87
30.88
64.43
831.48
8186.962555
0.380139001
3428.261761
PRICE
Enterprise Value
Debt Outstanding
Common Equity Value
No of Shares Outstanding
Price
6516.608
352.2
6,164.4
171.552
35.93
growth
rate
35.93
2.10%
2.40%
2.70%
3%
3.30%
3.60%
3.90%
9.85%
48.99
50.06
51.22
52.48
53.86
55.37
57.03
10.85%
43.08
43.85
44.68
45.56
46.52
47.56
48.69
Cost of Equity
Cost of Debt
Tax Rate
12.0%
7.0%
0.25
Debt
Equity
Debt/(Debt+Equity)
352.2
1,662.90
0.17478
Discount Rate
Long Term Growth Rate
WACC
11.85% 12.85%
38.39
34.57
38.95
35.00
39.56
35.45
40.21
35.93
40.90
36.45
41.64
36.99
42.44
37.57
13.85%
31.40
31.73
32.08
32.45
32.83
33.24
33.68
12.9%
3%
14.85%
28.73
28.99
29.26
29.55
29.84
30.16
30.49
15.85%
26.46
26.66
26.87
27.10
27.33
27.58
27.83
Public Comps
› Traditional Competitors
– Stable growth, Comprehensive products line
– Moderate P/E, P/S etc. ratio
› CA Technologies (NasdaqGS:CA)
– information technology (IT) management software products
– mainframe and distributed software products with a focus on mainframe, service assurance,
security (identity and access management), project and portfolio management, service
management, virtualization and service automation, and cloud computing
› Hewlett-Packard Company (NYSE:HPQ)
– HP Software segment provides enterprise IT management solutions, information management
and business intelligence solutions, and communications and media solutions
› International Business Machines Corp. (NYSE:IBM)
– Software segment,: WebSphere software to integrate and manage business processes;
information management software for database and enterprise content management,
information integration, data warehousing, business analytics and intelligence, performance
management, and predictive analytics
Source: Capital IQ
Public Comps
› Innovative Competitors
– High growth, New technology focused: Open Source, Cloud Computing
– High P/E, P/S etc. ratio
› Red Hat, Inc. (NYSE:RHT)
– open source software solutions to enterprises worldwide
– Red Hat Enterprise Virtualization Hypervisor; Red Hat Enterprise Virtualization Manager
› VMware, Inc. (NYSE:VMW)
– provides virtualization and virtualization-based cloud infrastructure solutions
– Addresses a range of information technology problems that include cost and operational
inefficiencies, facilitating access to ‘cloud computing’ capacity, business continuity, software
lifecycle management, and corporate end-user computing device management.
Source: Capital IQ
Stock Performance Comparison YTD
BMC: Under Performance compared with its competitors this Year*
* HP’s poor performance results from management instability and blurred strategy
Public Comparables Analysis
Com parables
2011/11/13
Enterprise Value/
Market Cap
Ticker
Com pany Nam e
EBITDA
EBIT
Revenue
(mil's $)
P/E
P/CFO
P/S
BMC
BMC Softw are Inc.
7.44
9.18
2.43
6375.62
11.30
10.03
2.86
CA
CA Technologies
6.00
7.24
2.13
10790.48
9.80
7.93
2.22
HPQ
Hew lett-Packed Company
3.78
5.22
0.53
54800.55
6.20
4.60
0.44
IBM
International Business Machines Corp.
9.09
11.14
2.25
220849.47
13.10
11.30
2.02
RHT
Red Hat, Inc.
38.61
49.74
8.49
9651.59
46.00
37.82
7.98
VMW
VMw are, Inc.
44.93
59.80
11.00
42500.78
42.10
36.19
9.91
P/CFO
P/S
P/E
Price from P/E:
$ 33.44~59.84
Min
6.2x
4.6x
0.4x
Mean
23.4x
19.6x
4.5x
Median
13.1x
11.3x
2.2x
Max
46.0x
37.8x
9.9x
Price from P/CFO:
$ 42.18~73.05
Min $
$
15.83
$
17.16
$
5.04
Price from P/S
$ 25.63~52.15
Mean $
$
59.84
$
73.05
$
52.15
Median $
$
33.44
$
42.18
$
25.63
m ax $
$
117.43
$
141.19
$
114.55
m ax - m in
$
101.60
$
124.03
$
109.51
Final Valuation & Recommendation
Methods
Weight
Value*
Price from P/E:
10%
$ 46.64
Price from P/CFO:
10%
$ 57.61
Price from P/S
10%
$ 38.89
DCF
70%
$ 35.93
*Average of Mean and Median for Multiples
Weighted Value:
$ 39.46
Current Price
$ 37.47
DCF
Put On Watch List
P/S
P/CFO
P/E
$-
$10
$20
$30
$40
$50
$60
$70
$80