In the bruising, hypercompetitive world of Silicon Valley, it's often said that the best technology doesn't always win. Poor execution, marketing miscues, strategic errors and sometimes plain old bad luck can overshadow the best hardware or the best code.
Ten years after it was founded, it would be hard to find a company that better illustrates the truth of that sad adage than
Once a highflier in the markets and a leader of the technology pack, BEA has struggled for several years, fighting the multiple devils of increased competition, falling prices and an internal battle over corporate strategy that led to the resignation of six top executives last year.
Its technology remains highly rated, but the turmoil has delivered a long-term hit to shareholder value. Over the last two years, the stock has lost 28%, while the tech-heavy
gained 57%. In 2002, for instance, BEA was trading at 71 times forward earnings; today it trades at 21 times 2005 estimates and 18 times 2006 estimates, according to Baseline. And despite a run-up since the summer, the stock is still off 38% over 12 months.
BEA has a strong balance sheet and cracked the $1 billion-a-year revenue mark in 2004; it certainly won't collapse. But Wall Street has gotten so wary of the stock that many investors are holding on to it more in hopes of a buyout by a larger rival than in the expectations of markedly better performance.
"I don't see BEA being a stand-alone company two years from now," said Brent McGibbon, principle of McGibbon Asset Management. "These guys
BEA management are spinning the story to make it look like they are big bad software guys -- but they are not."
, which has expressed interest in BEA more than once, eventually will buy the company for about $10 a share. (It closed at $8.04 on Thursday).
Gus Zinn, associate portfolio manager for Waddell & Reed Investment Management, which owned 3.1 million shares at the end of 2004, thinks it could fetch a somewhat higher price, and said
are potential buyers.
With fourth-quarter earnings due next Thursday, you might expect a lot of nervousness at BEA's headquarters. But if it's there, it's well hidden. In a recent interview with
, co-founder and CEO Alfred Chuang didn't sound at all like a man whose company is in trouble. He exuded confidence, and when asked when BEA might reach $2 billion in revenue, he replied: "Two billion? The number I'm focusing on is $3 billion." He predicts that his company will scale that peak within four years.
Chuang dismissed much of the criticism that analysts have leveled against BEA, and when asked about the loss of shareholder value, he said: "We should be valued more as a company. The world doesn't understand us enough because what we do is provide the enabling technology."
Although that sounds rather petulant, Chuang may have a point. BEA's core product is a complex software program called an application server, which allows applications to work together on a Web-based business network. App servers, as they are called, are invisible to the end users, and few people in a company outside of the IT department need to be aware of their existence. Applications such as customer relationship management, or productivity suites, as well as databases, are evident to everyone, making their vendors easier to understand.
And despite the barrage of negative news lately, BEA's app server is still considered one of the very best on the market. "BEA's products are excellent. When they get to a technical shootout, they normally win," said Joanne Correia, vice president of market researcher Gartner. But Correia quickly added: "The problem is getting that far. They are being surrounded, by IBM, Oracle,
and the open-source companies."
According to Correia, BEA led the application server market until 2002, when IBM jumped into a seven-point lead. Big Blue increased the lead to 13 points in 2003, and while 2004 numbers are not ready, she believes the gap could get even larger.
Chuang's response to the Gartner numbers was a pointed declaration and a rant about how Gartner allegedly overcounts IBM's software revenue. To be fair, market-share numbers in the software business are a moving target, and IBM, in particular, is a hard company to track, researchers say.
Dennis Byron, who tracks application servers for rival researcher IDG, said BEA has a solid lead over IBM, if one ignores IBM's legacy mainframe and AS 400 businesses and focuses on the Unix and Linux markets.
In any case, competition from Oracle, which finally has a decent app server to sell, and others, is heating up. Prices have been sliding for some time, and last year average selling prices were off by nearly 10%, according to Richard Williams, chief software analyst for Garban Institutional Equities.
Even worse: IBM's total cost of ownership for middleware, a broader category that includes app servers, is "significantly lower," said Goldman Sachs analyst Sarah Friar. Her assertion was rejected by Chuang, who said cost-of-ownership numbers often ar exaggerated by customers hoping to get a better deal.
Even so, Chuang is buoyed by the likelihood that the upcoming fourth-quarter numbers will be strong. Nearly every sell-side analyst who covers BEA figures it will hit or modestly exceed revenue and earnings targets. Analysts polled by Thomson First Call are expecting a 10 cents-a-share profit on sales of $285.4 million.
However, the real tell will be license revenue, a key indicator of new business. BEA's license revenue has declined on a year-over-year basis for three straight quarters.
"Everyone in the company, from the receptionist to me is focused on license revenue growth," Chuang said. Because he spoke to
during a quiet period, he couldn't comment on the chances of reversing the losses this quarter.
But Wall Street can comment, and the general sentiment is not sanguine. Analysts are expecting license fees of about $130 million, which would be a 9% drop.
License revenue, of course, goes up only if new customers come in the door, or existing customers buy new products. Chuang's plan to win new business has two major parts:
- A restructured sales force that will focus heavily on the largest accounts and a new attempt to move a significant part of the business into the distribution channel.
A renewed push into new products for specific industries, particularly telecom, which generally accounts for about 23% of the company's license revenue.
Licensing Leads the Way Lower
Marge Breya, BEA's newly appointed chief marketing officer, calls the strategy "wallet share. We're going to focus on 100 or 150 strategic accounts and push to expand our presence there," she said. And because there's a general consensus within the industry that IT spending will continue to grow slowly this year, the approach is likely a good one.
Breya, a veteran of another very technically oriented company --
-- and an engineer, clearly has the resume for the job. But whether or not she can make it work is another question. BEA has a history of very poor sales and marketing execution.
The move into the distribution channel, for example, has been cooking for some months, but Chuang admits that it is just starting to pay dividends.
BEA's splashiest effort in some time has been the launch of Project DaVinci, a suite of products and tools to help telecommunications companies build VoIP (voice-over-Internet protocol), multimedia and wireless services. The market for those is not yet huge -- about $250 million or so -- but within three years, said Yankee Group analyst Rob Rich, it will be several billion dollars.
BEA has DaVinci products ready, but how quickly they will sell is unclear, particularly given the utterly chaotic state of the telecom market.
In fact, DaVinci could be another metaphor for the state of BEA -- a piece of great technology that the company couldn't exploit. Or, along with BEA's new executive team and strategy, it could be part of a real turnaround. For the moment, Wall Street's attitude can be summed up in two words: "Show me."