Does BMC Deserve a Reboot?


By Margaret Popper You would think by now the stock market had priced in all the bad earnings news there is to price in. Not so. In recent days, stock prices have been heading south, ostensibly because investors are skittish about earnings prospects. BMC Software (BMC) is a case in point. The company's share price dropped 7%, from $20.45 to $19, on the news that it had met its revenue and earnings targets, albeit revised, for the first quarter of fiscal 2002. At least one analyst even downgraded BMC after its July 23 announcement, according to FirstCall research.

However, analysts may be too focused on BMC's short-term earnings. More important is a basic strategic shift the company is attempting. A seller of database- and applications-management software that helps companies optimize capacity and availability of specific elements of their IT infrastructure, BMC has decided to migrate toward selling service-management software that can integrate an entire system from end to end. If BMC pulls it off, it could be positioned for really fast earnings growth -- and the current weakness in its share price might make it an option worth checking out.

Even analysts who question BMC's strategy acknowledge that its franchise in database- and applications-management software should give a boost in its efforts to sell end-to-end solutions. "BMC has a huge customer base, and it's a high quality list," says Bear Stearns analyst David Breiner.

LESS-CROWDED FIELD. Still, it's a tricky transition to make. Because BMC's software is key to running their businesses, customers have been willing to build individual pieces of their systems around it. Now, the company has to convince them to make BMC software integral to their entire computer networks. And with the economy slowing, few CIOs are inclined to take such a big-picture perspective. Many prefer to make smaller investments in quick fixes -- moves that yield an immediate return on investment and don't bend budgets out of shape. "I like the BMC strategy in concept," says Breiner. "But customers are buying more tactically, rather than buying end-to-end strategic solutions. How much of that is a secular trend and how much is due to the economy is hard to say."

BMC CEO Bob Beauchamp contends that that will change as soon as the economy improves because the greater efficiency of an end-to-end solution justifies the additional cost. In the meantime, the trend toward sticking with fewer, more reliable, software vendors works in BMC's favor, Beauchamp says. "A year ago, whenever you went to make a sale, a customer would bring up a [software package] from some dot-com or other," he notes. Competition is a lot slimmer now.

Still, many analysts are highly skeptical of Beauchamp's rosy view. In BMC's most recent quarter, revenues fell to $339 million, off 9% from the same quarter a year ago. Income before amortization of goodwill and special charges of $16.6 million was down 67% vs. the first quarter of fiscal 2001. The second fiscal quarter is also expected to be weak. But Beauchamp expects the full fiscal year to be decent, with earnings growth of 15% to 18% on revenue growth of 4% to 6%. Revenues, he figures, will hit $1.57 billion to $1.6 billion for fiscal 2002, and earnings will rise to between 90 to 93 cents a share.

FUTURE STOCK? That scenario could play out only if BMC has very strong numbers for December and March. "These are typically strong quarters for BMC. It's just a question of how strong," says Breiner. It also will require Beauchamp to succeed in cutting about $100 million out of BMC's costs during the year by trimming travel, advertising, and other discretionary spending. Recent layoffs and continued employee attrition also are part of the plan.

Analysts like Breiner are far more conservative. He predicts revenues of $1.5 billion for fiscal 2002 and earnings per share of only 79 cents. Even so, he has a 12-month target price on the stock of $25 a share, well above where it's currently trading. In fact, the range of 12-month target prices among analysts runs from $24 to $40, according to FirstCall Data. Some of these targets may be adjusted downward as analysts continue to reassess their numbers. But the upside still seems considerable. This could be one tech stock with a future. Popper covers the markets for BW Online in our daily Street Wise column


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