RealMoney Silver - BEA Systems Finally Delivers

BEA Systems Finally Delivers
By Bob Faulkner
RealMoney Contributor
11/16/2007 10:41 AM EST

Updated from 5:22 p.m. EST on Nov. 14.

BEA Systems (BEAS) announced results last night that finally lived up to the rhetoric of the last year or so. More importantly, the outlook for December is well above Street consensus as well. The company also completed filing all of its delinquent SEC documents, so this was the first quarter in many for which details and comparisons were available.

Revenue in the quarter was $384 million (+11% year over year; +5% quarter over quarter), with pro forma EPS of 19 cents (GAAP = 13 cents). Product licenses were $135 million (35% of total) in the period, down 1% from the prior year but up 10% sequentially. Services were $250 million, up 18% year over year and 3% quarter over quarter.

The gross margin in the period was 76.8%, up 80 basis points year over year and 90 basis points quarter over quarter. The operating margin was 16.7%, up nearly 600 basis points from last year and 240 basis points from the prior quarter. Cash from operations was $84 million vs. an increase of about $30 million from the year-ago period, and the cash account increased by about $120. Accounts receivable was essentially flat, reducing days sales outstanding by three days, to 70 days.

The Aqualogic product suite (the flagship of the company's service-oriented architecture) represented 27% of new licenses, up from 24% the last two quarters. This translated into revenue growth of 33% year over year and 23% quarter over quarter. The new WebLogic Communications Platform had a record quarter, and management expects a strong performance in the future as it upgrades the WebLogic installed base.

For a number of quarters, the company has been restructuring its sales operations (more reliance on indirect) and streamlining overall operations. On a pro forma basis, the results of those actions are finally starting to appear. The pro forma operating margin was 25% vs. 21% last quarter and 17% in first quarter 2008. More importantly, the incremental operating margin (leverage on an incremental $1 of revenue) has been 41% in the first quarter, 87% in the second quarter and 100% in the third quarter. Management anticipates that there is more to come as well.

Guidance for the December quarter was particularly strong. Revenue is expected to be in the $420 million to $434 million range, or up 7% to 11% year over year, with license revenue in the 39% to 41% range. The pro forma operating margin is targeted to be 27% to 28%, and the tax rate should be 28%. By my calculations, this should translate into pro forma EPS of 22 cents to 23 cents. Current consensus is $391 million and 15 cents.

By nearly any metric, BEA Systems had the kind of quarter that the company has been talking about for some time. However, when the limited data available don't support the rhetoric, it's tough to accept on face value. Aqualogic appears to be showing the strength that management had anticipated, and the leverage in the operating model is quite apparent. Now it remains to be seen whether or not these results will entice acquisition interest anew.

BEA Systems Earnings Preview: BEAS Needs Blow-Out Quarter

BEA Systems (BEAS) will be announcing revenue for its third quarter after the close tomorrow with a conference call at 5:00 p.m. EST. BEAS has not filed documents with the SEC since the April quarter of 2006 due to its options back-dating investigation. Early on Nov. 14, the company announced it would file all delinquent SEC documents on Nov. 15, presumably meaning that it will report a full P&L and balance sheet on Thursday evening. As for right now, current consensus is for revenue of $375 million, up 8% year over year and 3% sequentially.

In the prior quarter, revenue was $365 million (+7% year over year; +8% quarter over quarter). Product license fees were $123 million in the period, down 10% from the prior year but up 7% sequentially. Services were $242 million, up 19% year over year and 5% quarter over quarter.

The Aqualogic product suite (the company's services infrastructure for heterogeneous product support) was 24% of new licenses flat on a percentage basis with the second quarter. Aqualogic revenue was up 9% year over year and 7% quarter over quarter. This suggests that the older products (WebLogic and/or Tuxedo) are on the wane.

While it will be interesting to finally see six quarters of detailed results, I don't think that's really what investors are waiting to hear about. As we all know, BEAS has been posited as an acquisition candidate by numerous analysts, investors and talking heads for the last couple of years. But when an offer finally showed up from Oracle (ORCL) at $17 per share, BEAS played hard to get, indicating publically that they were worth $21 per share.

Management continues to believe that the industry is in the early stages of a move to SOA (service oriented architecture). However, the tepid performance of Aqualogic (its SOA platform) over the last couple of quarters provides little to support that claim. In fact that most of the growth has come from the company's services operations.

BEAS is going to have to post some very impressive license revenue growth numbers in order to convince the skeptics and increase the Oracle bid. Maybe that's what they showed on nondisclosure to investor Carl Ichan recently to get him off their back. But lacking a blow-out quarter, BEAS is going to be hard-pressed to make its case.