Updated from May 14
BEA Systems was drifting slightly lower Thursday, as the market reacted to news that first-quarter earnings and revenue were up, but license revenues were off.
In recent trading, shares of the enterprise software developer were off 16 cents, or 1.4%, to $10.99 a share.
Although the company on Wednesday said it had equaled expectations for the April quarter, several analysts were somewhat negative. And it's becoming clearer that Wall Street wants proof that the company is gaining traction in the application integration space.
Net income in the quarter was $24.5 million, or 6 cents a share, up from $3.9 million, or 1 cent a share a year ago, according to generally accepted accounting principles. Revenue was $237.3 million, up 5.5% from the $224.8 million reported a year ago.
Pro forma income was 7 cents a share. Analysts polled by Thomson First Call had expected pro forma earnings of 7 cents on revenue of $236.8 million.
Pro forma operating income was $39.8 million, a 14% increase over last year's first quarter butlicense revenue was $122 million, a drop of 7% from $131 million a year ago.
Deferred revenue was down slightly to $231 million from $233 million in the January quarter. Analyst Trip Chowdhry of Midwest Research noted that the sequential decrease in deferred revenue is unusual for BEA. "It indicates they aren't winning as much ongoing business," he said. His firm has no banking relationship with BEA.
Commenting on the drop in license revenue CEO Alfred Chuang said "Our license revenue is bigger than that of Siebel Systems, PeopleSoft -- companies that are significantly bigger than ours. On a relative basis, we have not done poorly."
Looking forward, BEA expects second-quarter net income to be sequentially flat, while revenue will range from sequentially flat to an increase of 5%.
Part of the reason for the cautious guidance, Chuang said on a conference call with analysts, is the effect of SARS on the company's Asian business. SARS, he said, will cut total revenues from 2% to 5%.
Wall Street was expecting earnings of 7 cents on revenue of $244.5 million, roughly the midpoint of BEA's guidance.
BEA's showing in the first quarter didn't come as a surprise. Sell-side analysts who follow the company had been saying for at least a few weeks that the quarter was probably a done deal. However, the longer-term outlook is controversial, particularly BEA's chances of making significant headway in the application integration market.
Analyst Cheng Lim of Fulcrum Global Partners recently downgraded BEA to sell, saying he was not convinced the company can make headway against the pure-play integration vendors. "Although the company has stated its intention to pursue an industry approach to integration, we have not found evidence of follow-through and effective execution in this area. At this time, we do not believe the BEA sales, marketing and sales engineering organization is equipped with the requisite skill set and domain expertise to effectively compete with pure-play vendors such as
in the keenly competitive integration software market," he wrote in a note to clients. Fulcrum does not do investment banking.
Other sell-side analysts have expressed similar concerns and said Chuang's statement that integration revenue in the quarter was essentially flat from the previous quarter was not reassuring.
Lim also noted that BEA has suffered a number of significant departures lately, including key sales executives from the company's federal business -- an area making up about 15% of revenue -- and a key quality assurance executive, who reportedly had a conflict with management related to the direction of the integration business..
BEA has other problems, as well. Market researcher Gartner Dataquest recently found that
has displaced BEA as leader in the application server market -- BEA's core business. The survey also found that IBM has a commanding lead in the integration space, a market share of 17.4%, while BEA was lumped into the "other" category, behind Tibco, webMethods,
And annual license revenue decreased by 13.7% in fiscal 2003, including a year-over-year drop of 2.4% in the January quarter. In fact, since quarterly licensing revenue peaked at $172 million in January 2001, BEA hasn't come within $30 million of matching it. Service revenues, however, have grown.