MagicDiligence posted
an article last week comparing 4 enterprise software companies currently listed in Magic Formula® Investing (MFI) - Oracle (
ORCL), BMC Software (
BMC), CA (
CA), and Microsoft (
MSFT). The conclusion was that Oracle was the best looking stock in the bunch, but that all were attractive.
This remains the case for BMC Software. Let's take a closer look at this interesting stock.
BMC makes enterprise software for managing information technology (IT) systems within a company. IT infrastructure is the collection of all computer based assets, such as servers (web, application, database, etc.), storage, applications, compute hardware, network connectivity, etc. The company's products automate many routine tasks, provide a high level overview of IT diagnostics, allow quick reporting and action on problems, and so forth. The firm breaks its business up into three areas. Enterprise Service Management, or ESM, services "distributed" networks, those consisting of multiple different individual networks and computer resources. Mainframe Service Management, or MSM, sells to mainframe networks, where a set of central monolithic computers handles the majority of work and users use "dumb terminals" to access it. ESM is a slightly larger contributor to revenue, but MSM is a more profitable unit. The 3rd area is Services, which is consulting work, education (materials and seminars), and implementation help. Services is a slightly unprofitable category for BMC.
As explained in the linked article, enterprise software is an attractive industry. For BMC, recurring maintenance revenue account for about 50% of sales. Licenses to its software are sold on both term and perpetually renewing contracts. This means that a large majority of BMC's revenues are recurring, setting up stable streams of cash flow and protecting against dramatic peaks and valleys of profitability.
Additionally, enterprise software has high switching costs. Large companies put a lot of time, effort, and consideration to how they implement and deploy IT systems. It often takes months or even years to evaluate and decide on a solution. Once put in place, it is expensive, time consuming, and disruptive to business to make large changes. BMC's software is integrated, meaning its tools work together to provide comprehensive solutions.