Shares of BEA Systems ( BEAS) bounced up Thursday, a day after the company reported second-quarter results that were in line with Wall Street's estimates and said it was aggressively taking on IBM ( IBM). Shares of BEA rose as much as 15.3% Thursday before falling back to $6.34, still up 58 cents, or 10.1%. A day earlier the maker of application server technology reported net income of $20.2 million, or 5 cents a share, in the fiscal second quarter, which ended July 31. That compares with net income of $24 million, or 6 cents a share, in the same period a year earlier and a profit of $3.9 million, or 1 cent a share, in the first quarter. Excluding charges, BEA earned $25.9 million, or 6 cents a share, in the second quarter, compared with pro forma income of $43.9 million, or 10 cents a share, a year earlier. Pro forma profits were sequentially flat from the first quarter. The company said revenue fell 15.6% from a year ago to $225.9 million and was basically flat sequentially. License fees fell 27.9% to $124.1 million from $172.2 million in the same period a year ago and dropped 5.3% from $131.1 million in the first quarter.
BEA's earnings were in line with analysts' estimates gathered by Thomson Financial/First Call, while revenue came in just a shade short of the consensus expectation of $226.6 million. Several analysts responded with research notes Thursday characterizing BEA's results as respectable. "BEA's second quarter was a microcosm of why it remains one of the few stocks in our group where we retain a constructive opinion despite the difficult environment," wrote Merrill Lynch analyst Chris Shilakes. "At its current 18x calendar year 2003 EPS estimates, BEAS has limited downside and is among the best-managed companies in our sector." Thursday's gains bring BEA's price to 25 times Shilake's 2003 earnings estimate of 25 cents a share -- far closer to the historic low price-to-earnings ratio of 18 this year, according to Baseline, than the high of 752 in 2000. Shilakes has a buy rating on BEA. (His firm expects to receive or intends to seek compensation for investment banking services from BEA within the next three months.) Shilakes noted that the second quarter marked BEA's 19th consecutive quarter of positive operating cash flow. The company generated $32 million in cash from operations during the quarter. Short-term and long-term cash balances increased $26 million sequentially to $1.23 billion. In a research note Thursday, Credit Suisse First Boston analyst George Gilbert suggested the quarter was even better than it looked. He noted that the decline in license revenue was the one "blot on the landscape." But he believes unexpected strength in service revenue enabled BEA to build license backlog. That explanation is supported by several deals in excess of $1 million already closed in the third quarter, he said. Gilbert has a buy rating on BEA and his firm has done investment banking with the company. BEA expects third-quarter revenue to be flat to slightly up sequentially, while operating profits and earnings per share should be similar to second-quarter numbers. Third-quarter license revenue is expected to be flat to slightly down based on seasonal patterns, particularly in Europe, while service revenue is expected to be up slightly.
Wall Street estimates show BEA's earnings going up a penny in the third quarter and two pennies more in the fourth quarter. The consensus estimate pegged third-quarter revenue sequentially flat and fourth-quarter revenue climbing to $243.3 million. Analysts interpreted those forecasts as a slight reduction from the previous guidance for fiscal year 2003 revenue, which covered a range between 5% higher and lower than a year ago, with earnings of 27 cents to 33 cents a share. Gilbert, for instance, concluded the bottom of the old range (a 5% drop year-over-year and 27 cents) is now the top of the new range. BEA was particularly bullish Wednesday about its competitive edge over rival IBM. BEA said it beat IBM in direct competition 210 times in the fiscal second quarter, out of a total of 220 competitive situations. But it's not clear how often sales reps would report when they lost, when they walked away from tough deals and how often BEA wasn't even at the bidding table, CSFB's Gilbert noted. More interesting, he said, was the statistic that BEA replaced IBM 33 times on projects that weren't working and won new business in 93 accounts that previously were IBM customers. But not everyone was buying BEA's aggressive tone. Lazard Freres analyst Erick Brethenoux, who has a hold rating on BEA, said in a research note that he believes the company's vision remains unclear and its outlook cloudy, leading him to reduce his price target to $7 from $12. One of his concerns is that BEA hasn't made any strategic move to pull the company out of what he calls the "application-server commoditization death spiral," referring to concerns that BEA's WebLogic application server is exposed to the falling price of a commodity platform. "The company seems, nonetheless, marooned in a dangerous state of technology inertia," Brethenoux said in his note. His firm offers investment banking advice and other services to BEA. U.S. Bancorp analyst Michael Marzolf also was more cautious and recommended accumulating BEA shares below $5. "Stock sentiment is terrible," Marzolf said in a note. "BEAS remains a tug-of-war stock, a scenario that rarely benefits those who are too early in jumping in to defend." Marzolf has a market perform rating on BEA and his firm has done investment banking with the company.