BEA Punished for Sales Miss

First-quarter earnings were in line, but license revenue and overall sales come up short.
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BEA Systems

(BEAS)

plunged more than 20% Friday after the company put up disappointing sales numbers in its first quarter.

Wall Street's reaction was swift and harsh. The stock began falling within moments of the earnings announcement Thursday evening, and in recent trading it was down $2.28, or 21%, to $8.50. BEA was trading above $14 as recently as January.

Excluding items, BEA reported earnings of $33.5 million, or 8 cents a share, on total revenue of $262.6 million. Analysts polled by Thomson First Call were expecting a pro forma profit of 8 cents a share on sales of $266.31 million. Revenue was up 11% year over year.

License revenue, a measure of new business in the software industry, was $120.2 million, down 2% from the year-ago quarter and well short of the company's guidance of $127 million to $132 million.

CEO Alfred Chuang acknowledged that the licensing miss was "disappointing" and said that sales in North America were the weak link. He said a reorganization of the sales force had caused more disruption than expected, and on a conference call with analysts and investors he mentioned that the head of sales from for that region has been replaced. For now, Charlie Ill, the head of worldwide sales, will handle North America.

The merger of a number of large banks and other financial institutions, a key BEA customer segment, also slowed sales, Chuang said.

According to generally accepted accounting principles, BEA reported a profit of $25.3 million, or 6 cents per diluted share, flat year over year. GAAP operating margins were 14.9%.

Chuang noted that his company booked 17 deals over $1 million, a first-quarter record. Other enterprise software companies that have reported recently have also said that deal sizes, which had been shrinking for some time, are now stabilizing or getting larger, a sign of increasing customer confidence.

Revenue guidance for the second quarter was also light. The company now expects total revenue to range from $265 million to $275 million, compared with Wall Street's expectation of $275 million. License revenue will range from $122 to $127 million. Jason Brueschke of Pacific Growth Equities said in a note that the guidance suggests license revenue will decline year over year in the second quarter.

European sales of $100 million performed very well relative to prior quarters, increasing 42% year over year, largely driven by the weakness of the dollar relative to the euro, Brueschke said. His company does not have a banking relationship with BEA.

BEA has underperformed the rest of the market much of the year, dropping 26% since peaking at $14.20 on Jan. 16, while the

Nasdaq Composite

and the Goldman Sachs Software Index each shed about 10%. The slide has continued this month as

investors worried that the company would issue disappointing first-quarter news. A number of sell-side analysts sparked a brief rally for BEA last week, saying that a miss seemed unlikely.