BMC Software, Inc. (BMC), Compuware Corporation (CPWR): Are These Software Makers Ripe for the Picking?

As information technology becomes continually more integral to businesses’ operations, the technology sector’s profits have become less variable and more predictable. The sector produces profits throughout the business cycle, which has attracted the attention of the big investment funds. In the mainframe segment, both BMC Software, Inc. (NASDAQ:BMC) and Compuware Corporation (NASDAQ:CPWR) have been targeted by hedge fund Elliott Management, as well as gaining interest from other private equity firms. So, are these companies worth watching?

Despite getting half of its revenue from the declining mainframe segment, BMC Software, Inc. (NASDAQ:BMC) has been able to find limited annual revenue growth by taking market share from rivals and adding functionality to its software offerings. It ended 2012 with a backlog of $2.2 billion, flat versus the prior year, and the company counts 95% of the 100 largest corporations as clients. Naturally, with its corporate customers spending an increasing percentage of their IT budgets on cloud computing offerings, BMC has also invested heavily in this area.

In FY2012, BMC Software, Inc. (NASDAQ:BMC) generated record financial results, although top line growth was hard to come by. For the period, the company reported increases in revenues and adjusted operating income of 5.2% and 6.4%, respectively, versus the prior year. While product sales growth was weak, BMC Software, Inc. (NASDAQ:BMC) gained traction in its professional services segment that advises customers on ways to gain efficiencies in their IT investments.

Looking ahead, BMC Software, Inc. (NASDAQ:BMC) is pursuing opportunities to sell software to the small and mid-sized company market, which was its rationale for the acquisition of Numara Software in February 2012. Despite lower margins, this segment opens the company to a much larger customer base and provides the opportunity to cross-sell its professional services. In addition, BMC Software, Inc. (NASDAQ:BMC) is partnering with consulting firms to improve its sell-through rate, including a recent agreement with CapGemini to distribute BMC’s software products to the consulting giant’s clients.

Compuware Corporation (NASDAQ:CPWR) has similarly felt the effects of the shrinking mainframe market, with a revenue base that has declined over the past five years. More so than BMC Software, Compuware Corporation (NASDAQ:CPWR) has attempted to shift its focus away from the mainframe market, with investments in the web performance, web security, and collaboration software areas. However, virtually all of the company’s annual profits continue to come from the mainframe segment.

In FY2012, Compuware Corporation (NASDAQ:CPWR) reported fairly weak financial results, with decreases in revenues and operating income of 5.3% and 18.8%, respectively, compared to the prior year. The company’s sales were hurt by a steep decline in its mainframe segment, as customers continue to lower their usage of mainframe computer systems. In addition, Compuware Corporation (NASDAQ:CPWR)’s newer software offerings have been unable to reach the critical mass necessary for improved profitability.