BMC Inc.
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Transcript of BMC Inc.
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BMC Inc.
Group Members: Liefeng (Richard), ZhangWenjie (Emma) Zhang, Ya Zuo, Yuwei Hong
November 15, 2011
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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 segmentsEnterprise Service Management (ESM)Mainframe Service Management (MSM)
• The company was founded in 1980 and is based in Houston.
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Screening Criteria
I. Client base1. High switching costs lead to a loyal client base. 2. Large and diversified client base
II. Cloud computingSoftware-as-a-service solutions
III. Financial Health1. $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
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Screening Criteria
Data source: Morning Star
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Portfolio Analysis
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Macroeconomic review
Data source: BMC Annual Report 2011 p30
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Market Risk
Data source: Capital IQ
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Market Risk
Data source: Capital IQ
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Foreign Currency Exchange Rate Risk
Data source: Capital IQ
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Relevant Stock Market Prospects
Data source: Capital IQ
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Historic growth
Data source: Capital IQ
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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
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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
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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
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Major Companies
• CA TechnologiesMarket share: 10.9%
• HPMarket share: 5.1%
• IBM
Data source: IBIS World Nov 2011 p22
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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
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Business Service Management
Source Official Website: http://www.bmc.com/solutions/bsm/business-service-management.html
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BSM
Source: Novell Video http://www.youtube.com/watch?v=br4IA32fqzs
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BSM
Source: Novell Video http://www.youtube.com/watch?v=br4IA32fqzs
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Values/Business
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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-service-management.html
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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-technology-is-ahead/
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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
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Revenue Breakdown
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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.
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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.
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Customers
Source: BMC Official website: http://www.bmc.com/customers/success
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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.
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International Presence
In 2011, 48.5% revenue comes from overseas
Screenshot from: Annual Report 2011
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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
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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.
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Business Strategy -- Partnership
› Salesforce.com : Remedyforce IT Help Des
› Cisco CSCO has equipped its Unified Computing System products with BMC's BladeLogic solution.
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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
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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, Hewlett-Packard HP, and CA Technologies.
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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.
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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.
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Leverage Ratio
› High Operating Leverage› Low Financial Leverage
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Financial Performance
Data source: BMC Annual Report 2011&2008 p.27
8.55%
49.59%
41.86%
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Revenue Growth
For the Fiscal Period Ending 03-2007 03-2008 03-2009 03-2010 03-2011 in millions dollars
Software License RevenueEnterprise Service Management 330.1 350.5 434.9 462.2 550.9Growth rate % 6.18% 24.08% 6.28% 19.19%Mainframe Service Management 239.70 297.10 274.8 296.2 313.6Growth rate % 23.95% -7.51% 7.79% 5.87%Total software license revenue 569.80 647.60 709.70 758.40 864.50 Growth rate % 13.65% 9.59% 6.86% 13.99%
Software Maintenance RevenueEnterprise Service Management 478.1 517.4 547.3 550.9 551.5Growth rate % 8.22% 5.78% 0.66% 0.11%Mainframe Service Management 440.7 450.3 470.5 472.8 472.7Growth rate % 2.18% 4.49% 0.49% -0.02%Total software maintenance revenue 918.8 967.7 1017.8 1023.7 1024.2Growth rate % 5.32% 5.18% 0.58% 0.05%
Professional services:Domestic 36.6 47.1 62.8 59.8 85.9Growth rate % 28.69% 33.33% -4.78% 43.65%International 55.2 69.2 81.6 69.3 90.7Growth rate % 25.36% 17.92% -15.07% 30.88%Total professional services revenue 91.8 116.3 144.4 129.1 176.6Growth rate % 26.69% 24.16% -10.60% 36.79%
Data source: Annual Report 2011&2008 p.27
Median
Slow
High
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Ratios Analysis
For the Fiscal Period Ending 03-2007 03-2008 03-2009 03-2010 03-2011
Profitability Return on Assets % 6.62% 9.37% 6.44% 9.81% 10.17% Return on Equity % 20.58% 31.53% 22.71% 29.26% 27.43%
Margin Analysis Gross Margin % 76.57% 77.22% 77.30% 78.48% 76.58% SG&A Margin % 43.79% 46.77% 48.37% 49.38% 47.14% EBIT Margin % 13.12% 20.65% 19.65% 26.48% 25.80% Net Income Margin % 13.66% 18.11% 12.72% 21.25% 22.09%
Asset Turnover Total Asset Turnover 0.48 0.52 0.53 0.49 0.48 Fixed Asset Turnover 1.07 1.15 1.02 0.87 0.93 Accounts Receivable Turnover 5.00 5.83 5.90 5.79 5.21
Short Term Liquidity Current Ratio 1.45 1.40 1.17 1.42 1.63 Quick Ratio 0.97 1.23 1.01 1.26 1.48
Long Term Solvency Total Liability/Equity 2.11 2.36 2.53 1.98 1.70 LT Debt/Equity 0.00 0.00 0.30 0.25 0.20 Total Liabilities/Total Assets 0.68 0.70 0.72 0.66 0.63 EBIT / Interest Exp. 138.20 325.00 21.64 23.76 26.91 EBITDA / Interest Exp. 245.40 463.27 32.39 32.01 36.51
Cash FlowOCF growth rate 41.32% -2.36% 9.61% 20.43%OCF/Sales 26.58% 34.29% 30.97% 33.25% 37.05%OCF/Net Income 194.58% 189.32% 243.47% 156.46% 167.73%
Data source: BMC Annual Report 2011&2008 p.55-58
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DuPont Analysis
Period Ended 2007 2008 2009 2010 2011Tax Burden 71.82% 72.19% 65.43% 80.54% 85.86%Interest Burden 145.01% 121.51% 98.94% 99.62% 99.72%Operating Profit Margin 13.12% 20.65% 19.65% 26.48% 25.80%Asset Turnover 48.48% 51.76% 50.63% 46.19% 46.04%Leverage 310.74% 336.40% 352.65% 298.16% 269.73%ROE 20.58% 31.53% 22.71% 29.26% 27.43%
Data source: BMC Annual Report 2011&2008 p.55-58
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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 year-
ago 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
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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
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DCF Valuation
Cost of Equity 12.0%Cost of Debt 7.0%Tax Rate 0.25
Debt 352.2Equity 1,662.90Debt/(Debt+Equity) 0.17478
PRICE35.93 9.85% 10.85% 11.85% 12.85% 13.85% 14.85% 15.85%
2.10% 48.99 43.08 38.39 34.57 31.40 28.73 26.462.40% 50.06 43.85 38.95 35.00 31.73 28.99 26.662.70% 51.22 44.68 39.56 35.45 32.08 29.26 26.87
3% 52.48 45.56 40.21 35.93 32.45 29.55 27.103.30% 53.86 46.52 40.90 36.45 32.83 29.84 27.333.60% 55.37 47.56 41.64 36.99 33.24 30.16 27.583.90% 57.03 48.69 42.44 37.57 33.68 30.49 27.83
WACC
growth rate
Discount Rate 12.9%Long Term Growth Rate 3%
ForecastFor the Fiscal Period Ending 03-2012 03-2013 03-2014 03-2015 03-2016 03-2017 03-2018 03-2019Net Income 338.08 354.66 412.41 417.34 478.94 477.44 496.63 574.06Add D&A 172.88 190.13 198.87 200.70 206.30 209.81 218.05 223.87Capex 26.63 32.49 38.28 36.42 39.74 36.94 32.95 30.88Chg in Working Capital 201.91 98.24 84.81 94.32 132.31 132.76 69.66 64.43
FCF 686.24 610.55 657.81 675.94 777.81 783.07 751.40 831.48Terminal Value: 8186.962555
Discount Factor 0.886121 0.78520961 0.69579 0.616554 0.546341 0.484124 0.428992 0.380139001PV 608.0916 479.406271 457.6972 416.753 424.9492 379.1033 322.3458 3428.261761Enterprise Value 6516.608
Enterprise Value 6516.608Debt Outstanding 352.2
Common Equity Value 6,164.4No of Shares Outstanding 171.552Price 35.93
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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
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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
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Stock Performance Comparison YTD
BMC: Under Performance compared with its competitors this Year*
* HP’s poor performance results from management instability and blurred strategy
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Public Comparables Analysis
P/E P/CFO P/S
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
Min $ 15.83$ 17.16$ 5.04$
Mean $ 59.84$ 73.05$ 52.15$
Median $ 33.44$ 42.18$ 25.63$
max $ 117.43$ 141.19$ 114.55$
max - min 101.60$ 124.03$ 109.51$
Price from P/E: $ 33.44~59.84
Price from P/CFO: $ 42.18~73.05
Price from P/S $ 25.63~52.15
Comparables
2011/11/13 Enterprise Value/ Market Cap
Ticker Company Name EBITDA EBIT Revenue (mil's $) P/E P/CFO P/S
BMC BMC Software 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
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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
Put On Watch List