BMC Software Has Value, But Growth Is Unimpressive

Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There’s been a lot of activity lately within the software industry, as companies bustle to position themselves for the expected battle for cloud real estate. As companies such as database giant Oracle and IBM have taken M&A to a new level with a plethora of buys, BMC Software (NASDAQ: BMC) has gone in a different direction.

The company has opted to grow its cloud market share by investing in its R&D as well as strategic partnerships with -- among others -- (NYSE: CRM), an IBM and Oracle rival with outrageous growth expectations of its own. BMC's deal with Salesforce integrated the former's Service Desk with the latter's developer platform,, in hopes of mutually beneficial market share gains. But the partnership doesn’t seem to be working as planned.

On the heels of BMC's recent quarter, which saw double-digit declines in both enterprise and mainframe service management, the Street has begun to wonder whether BMC is taking the right approach. While it’s not unusual to see its mainframe business growing more slowly than its other segments, investors want reassurances that the company can expand its customer base into emerging markets.

The abundance of competitors means that any growth within the cloud market should not be taken for granted. Still, growth that comes in at less than double digits makes it hard to generate any sort of excitement for the stock. What’s more, BMC hasn't posted healthy revenue progression for quite some time.

Intensifying the situation, BMC has also showed some declines in profitability, even as expenses have risen by 11%. Though its operating margins have remained steady and somewhat consistent over the past several years, this trend has been one of the major challenges in assessing BMC’s long term value. Its recent execution draws investor concerns as to whether or not its current strategies are working. Clearly, they aren't -- at least, not enough to make the stock look enticing now.

The acquisition debate
BMC has considerable value -- but to whom? One of its biggest shareholders, Elliot Associates, has been pushing for BMC to sell itself, a demand the company has been fighting to keep quiet. However, even if BMC were to oblige, who would be interested? Oracle and IBM might bite, but I don’t see BMC benefiting either one very much.

Other enterprise titans such as Microsoft (NASDAQ: MSFT), which has its own cloud and CRM solution, may make sense; it could certainly capitalize on BMC’s mainframe database tools. For that matter, both Cisco (NASDAQ: CSCO) and Hewlett-Packard (NYSE: HPQ) come to mind for similar reasons, as both would be able to leverage their existing footprints in enterprise to grow their respective cloud strategies into markets that make them more competitive. Cisco has the cash to make the deal happen tomorrow if it wants. The cost is the only question.

Bottom line
As BMC sorts out its future as an independent or acquisition candidate, the company’s challenge will be to figure out a way to prove its value and convince a skeptical market that it is willing to do anything it can to return capital to shareholders. Its fundamentals, which include just under $1 billion in net cash, offer good reason to believe there is yet value in the stock. Nonetheless, absent significant growth in its products and services, that value many never be realized, as it is likely to result in a weakening rate of cash flow. 

rsaintvilus has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft and has the following options: short JAN 2013 $150.00 calls on and long JAN 2013 $150.00 puts on Motley Fool newsletter services recommend Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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