BMC reenergized its profitable but neglected mainframe software business in 4Q07 by introducing new products and leveraging its mainframe assets to promote its breadth of coverage in BSM. TBR believes the company will continue to grow margins and increase its rate of revenue growth throughout 2008, despite imposing competitors and a slowing domestic economy.

BMC's 2007 success is the result of successful execution of an explicit strategy formulated in 2003. The company used the profits of its dwindling mainframe system management software business to develop and acquire a coherent and unified set of distributed system management products revolving around the Business Service Management (BSM) theme, the company's Atrium configuration management database (CMDB) and the information technology infrastructure library (ITIL) standard. BMC also restructured the whole company, focused on tight operational controls, and reformed its partner and professional services programs.

In 2H07, following consistent improvement in margins and growth, the company is refining its strategy, investing in and integrating its mainframe offerings into its BSM family, tolerating slow growth of operating expenses, and growing its professional services business to drive revenue growth. BMC has also signaled its willingness to slow its program of regular share repurchases to fund larger or more numerous favorable acquisitions.

TBR notes that BMC does face challenges: Its two main competitors IBM and HP are much larger, and both companies are aggressively growing their software operations both organically and through acquisition at rates faster than BMC. Both companies also have significantly larger professional services resources. IBM has a full breadth of systems management software offerings. HP also has a wealth of software products, but is not strong in mainframe management software, unlike both BMC and IBM. Both IBM and HP have the advantage of being hardware as well as software and service vendors, allowing them to offer customers more complete solutions.

TBR believes BMC will continue to succeed in its BSM niche, however; the company has differentiated itself by focusing exclusively on BSM and offering coherent integrated solutions across the breadth of systems platforms. Most important, however, is that BMC has fashioned an incremental prescription approach to implementing BSM that minimizes customization. When customers choose BMC, this is the approach they receive, with lower costs, lower risks and faster implementation as a result. While both major competitors offer similar road maps to BSM, their message is diluted by the breadth of options. TBR believes BMC's focused approach is gaining approval and will have more traction in tighter economic circumstances. We believe the company will increase its year-to-year growth rate into the mid-teens in 2008, and increase its operating margin into the mid-twenties.