Based in Houston, BMC Software (Nasdaq: BMCS) is one of the largest independent software companies in the world, with trailing revenues of $1.3 billion. The company started out selling products that helped technology departments manage mainframe computer systems, then branched into management software for distributed systems. Max Watson, a former IBM executive, talked to The Motley Fool about the e-commerce boom, how it's changed the market place, and spurred a new wave of business for the 19-year-old company.
TMF: First, tell us about the kind of software and services BMC provides.
Watson: Our software is used to ensure the availability of large-scale business systems, especially in the e-commerce arena. The concept here is, whether you're a dotcom like Amazon (Nasdaq: AMZN) or a more traditional company, you've got to get involved in e-commerce. Whether it's business-to-business or business-to-consumer, these systems have to be available around the clock, around the world.
TMF: So your software provides network management. It will police the network, flag problems, offer corrections, etc.?
Watson: It's much more than the network. We interface with a variety of network management products. Really, the uniqueness of what we do is to take an end-user perspective. Rather than worry about whether the network is operating, or the server is operating, or the database is operating, we look at it from the end user's point of view and ask whether the whole mix of technologies is working together to give them a good experience.
It's not about discrete technologies. Say you have a mainframe connected to a server by a piece of middleware. We manage that. We can predict what's going to happen and take corrective action. In many cases now the information technology department knows there's a problem before the end user and they can correct it before there's a bad experience. Managing a technology is necessary but not sufficient. Managing an Oracle database is necessary but you've got to do more. Managing [Windows] NT is necessary but you've got to do more. You have to look at the context of the application and the end user.
"There are new competitors today that can compete with the traditional companies globally overnight. They're incredibly well funded. Capital is virtually free, and your competitor doesn't have to make money for a long time. That's a tough deal."
TMF: Did that strategy evolve or have you always been focused on it?
Watson: Fortunately, products we've built over the last 19 or 20 years can play into that for large enterprises, but we've also developed unique competencies in the Internet space. We have very deep technology in a wide range of areas we can leverage to solve the problem.
TMF: How big a mix is the services part of your business?
Watson: This year services will be 3% or 4% of our business. It's small but last year we didn't have any. It's growing rapidly and what it enables us to do is provide a full solution to the customer -- products, services, and methodology. What we bring to bear in this is speed of implementation. We can implement what we call a service assurance centered around an SAP (NYSE: SAP) R/3 implementation, which is big, hairy, and nasty, and we can put it up in four months, sometimes less. Our deal has been quick return on investment.
TMF: The bulk of your customer base has been Fortune 500, Fortune 1,000 companies. How have you broadened that base?
Watson: With our initiative to push into distributed systems a couple of years ago, we're picking up customers like Amazon and National Discount Brokers (NYSE: NDB), and on and on. We're seeing now a broad customer set that would never have been part of our base a few years ago. The important message is we've demonstrated we can move into new markets, develop competencies, best-of-breed products, and then merge that back with our traditional customers.
TMF: When did growth in your distributed systems business take off?
Watson: It's really ramped up in the latest quarter. Our license revenue is up almost 100%. We are one of the top two or three major players in that space.
TMF: When did e-commerce really start kicking in a steady revenue stream for BMC?
Watson: We're really feeling it now, and early next year I think you're going to see Europe embrace the Web. This whole e-commerce is getting pushed from the top down, from the chairmen and the CEOs, because there's this big battle going on between the dotcoms, who are the Davids, and the traditional companies, who are the Goliaths.
There are new competitors today that can compete with the traditional companies globally overnight. They're incredibly well funded. Capital is virtually free, and your competitor doesn't have to make money for a long time. That's a tough deal.
"How would you like to be a retailer and your three best-selling products are books, CDs, and videos? How do you deal with that? Information technology is going to be the centerpiece of your strategy to compete."
TMF: You're serving both these customer sets.
Watson: Exactly. We've demonstrated competency and revenue capability in all these areas. It is nuts today in terms of complexity, scale, and user expectations. We have to make our products as perfect as possible because the end user expects a perfect experience. Look at National Discount Brokers. They'll tell you their average client has three other brokerage accounts, so if they don't serve them somebody else will. They're only a click away. These things are so complex and without us they're incredibly fragile. How would you like to be a retailer and your three best-selling products are books, CDs, and videos? How do you deal with that? Information technology is going to be the centerpiece of your strategy to compete.
TMF: A lot of the Enterprise Resource Planning (ERP) software vendors saturated their customer base and now are rushing to develop new products and new markets. Is this a roadblock for your company? You can sell to a midsize or small player as easy as a large corporation?
Watson: It's different than that. Yes, we're moving into the dotcom space because all the availability issues are incredibly important. But the traditional Goliaths in the industry, the Michelins and companies like that, are putting up big Internet applications so the market in our traditional customer set is expanding. All of a sudden they're realizing these systems have to be managed, and the back-end systems have to be brought up to speed too because they're not used to 24-hour availability. Our customers are leading us into all these new areas.
TMF: Again, the ERP vendors are now having to Web-enable their software. Is this a problem BMC is grappling with?
Watson: I wouldn't say we're grappling with it. It's an opportunity for us and we're addressing it. This is going to sound funny but ERP systems now are no longer strategic because everyone is doing it. If you install a big ERP system you're running with the pack, you're not ahead of it. Everybody's looking for new things to do and e-commerce is it. That breeds new technologies and we can just extend our management from the ERP to e-commerce. We just move right along with our commerce.
TMF: You preannounced in the second quarter in part because of contracts that were slow to come in. What happened there?
Watson: The biggest issue with Europe is earnings inconsistency and September is clearly is our most challenging quarter. The good news is North American revenues were up 55%. They're really killing it. What it demonstrates is the competitive environment that our customers are in in North America. In Europe I think that's really going to take off next year.
TMF: So the inconsistency comes from the customers?
Watson: No, it's on our part. No one can take credit for this except ourselves. I'm not blaming it on any external forces or anything, it's execution on our part. They'll have a few good quarters and get to feeling good and kind of forget they have to continue to deliver each and every quarter. I'm not blaming Y2K or anything. If you don't have control of your destiny, you're fooling yourself.
TMF: What's your biggest challenge going forward?
Watson: If we ever believe we have it totally right, we're doomed to failure. We always have to change. We always have to criticize. Success has the potential to be the greatest inhibitor of future success. We'll make some mistakes but we'll get more things right than we get wrong.
TMF: Any noteworthy competitors?
Watson: In the markets we're in, Computer Associates (NYSE: CA). But we share customers and both of us should prosper in this market. I really focus on us and our customers rather than our competitors.
TMF: You recently reached an agreement to buy Open Technology Limited, a software solutions company in New Zealand. What will this provide?
Watson: The company is based in New Zealand but they also serve a lot of the Asia Pacific region. OTL is a services organization and this is a jump-start for our services business in Asia. They built a practice around our Patrol family of products so it makes sense for us to acquire someone with experience implementing things like our services assurance products.
TMF: Thanks for taking the time to talk to us. Good luck.
Watson: Thank you.