"We'd always been strong looking at the back-end systems--Unix, NT, and mainframes--but in 1999, we took the Web-based services and tied them into this focus, so that you really see a holistic picture" of all operations, says Bob Kruger, VP of BMC's E-business apps services-management unit.

But integrating the two large companies it purchased in the first half of 1999 took its toll on BMC. In a $900 million stock transaction in March, BMC acquired Boole & Babbage Inc., a competitive provider of systems-management solutions for mainframe and client-server environments. In June, it purchased New Dimension Software Ltd., an Israeli company specializing in job scheduling and output management for distributed systems, for $650 million.

With almost 1,000 employees and an estimated worth of $225 million, Boole & Babbage, in particular, represented BMC's largest acquisition to date. Previously, its largest acquisition had been the 1998 purchase of BGS Systems Inc., a vendor of performance analysis and prediction technologies.

For the record, BMC says that 12-month revenue for calendar year 1999 was $1.56 billion, up nearly 39% from its previous high of $958.4 million in 1998. The company's 12-month net income also increased for the year--but only by 8%, from $299.8 million in 1998 to $328.4 million in 1999.

BMC struggled in 1999, says Chuck Phillips, a financial analyst with Morgan Stanley Dean Witter. "They've hit an air pocket in terms of growth. That has slowed in recent quarters," he says. "They've had trouble digesting some of the acquisitions they've made. That takes some time." For example, for the quarter ended Dec. 31, 1999, revenue increased 24% to $426.3 million compared with the year-ago quarter, but net earnings and diluted earnings per share, excluding merger-related costs and other factors, decreased 5% to $105.6 million and 9% to 41 cents, respectively.

Melissa Eisenstat, a financial analyst with CIBC Oppenheimer, agrees that BMC is "dealing with integration issues like it's never had before because it's never acquired such large companies before."

Yet BMC reported last month that it closed out its fiscal year 2000 with a 32% increase in revenue to $1.7 billion, and a 13% increase in net earnings to $444.6 million. Fourth-quarter total revenue increased 23% to $476.4 million, compared with $386.5 million for the same period a year ago, although 10% of that figure is due to a single large deal (the details of which were not disclosed) that the company had been unable to close in the previous quarter.

With the first quarter of BMC's new fiscal year under way, analysts are generally bullish about the company's fortunes going forward. Eisenstat rates BMC as a great long-term buy, and Morgan Stanley's Phillips--who also considers BMC a good buy--says BMC stands to benefit if IBM mainframe shipments pick up. Much of BMC's fortunes have been tied to its mainframe business, which includes its MainView OS/390 service-management and performance-and capacity-management offerings, core IMS and DB2 database tools and utilities, and maintenance revenue.

Mainframe shipments as a whole were negatively affected last year by the spectre of the Year 2000 bug. For example, for its fourth quarter of 1999, IBM reported net income of $2.08 billion, down 11% from its fourth-quarter 1998 results of $2.34 billion. The vendor blamed much of the income drop-off on poor mainframe sales as customers ramped up for Y2K. Last month, when IBM reported its first quarter results, mainframe licenses had slipped 28%.

"IBM's slowdown in [mainframe] growth didn't help, but if IBM's Mips shipments turn around by the end of the year, we should see a steady improvement in BMC throughout the year," Phillips says.

BMC reports that its total mainframe revenue for its most recent fourth quarter increased 8% over the fourth quarter of fiscal 1999, and increased 20% for fiscal year 2000. Last month, the company also launched new professional services for OS/390 customers, including a program to check readiness of users' OS/390, IMS, and DB2 implementations for E-business, as well as checkups for the "E-vailability" of OS/390, IBM, and DB2 platforms.

continued...page 2