Cautious Outlook Brings Down BEA - TheStreet

Updated from Feb. 20

A solid performance and cautious guidance. That's been the story for many tech stocks this year and

BEA Systems


is no exception. On Thursday, the enterprise software maker reported that it had tripled earnings and grown revenue nearly 8% in the January quarter.

But the company gave conservative guidance for the current quarter and none at all for the rest of its fiscal 2004. As a result, shares in BEA, which had run up solidly in the days before the announcement started sliding last night and continued to lose value Friday. In late morning trading, BEA is off 60 cents, or 5.4%, to $10.61 a share. The stock closed at $10.69 a share on Feb. 12 and rose as high as $11.88 before the close on Feb. 19, a gain of 11%.

Jason Brueschke, who follows the stock for Pacific Growth Equities, was disappointed in the guidance, and wrote that "new customer wins were disappointing. We remain concerned that BEA's ability to deliver $1 million-plus deals, the driver of licenses in the past two quarters, will be impacted out six to nine months, putting Q2 and Q3 at higher risk."

Brueschke is also concerned about the stock's high valuation. "We are hard pressed to pay 39x for a company facing this much competition and risk that is growing licenses at less than 5% year over year. Given the premium valuation and risk profile, we recommend taking profits at this time," he said in a note downgrading the stock to "under weight" from "equal weight." Pacific Growth Equities does not have an investment banking relationship with the company.

BEA said that revenue in the current quarter (its first of fiscal2004) would range from $235 million to $239 million, somewhat higher than Wall Street's estimates of $234 million. Earnings per share will be about 7 cents, in line with analysts polled by Thomson Financial/First Call.

Net earnings for the quarter ended Jan. 31 were $35 million, or 8 cents a share, according to generally accepted accounting principles, compared with a profit of $10.6 million, or 3 cents a share, including charges, a year ago. The revenue growth came despite a 2% drop in licensing fees. During a conference call with analysts, CEO Alfred Chuang said the growth came largely from services BEA provides to existing customers, which increased 22% to $114.8 million.

Excluding charges, BEA earned 9 cents a share on revenue of $249.3 million, both of which exceeded Wall Street's expectations. The fourth-quarter revenue was 7.8% higher than the year-ago quarter's $231.3 million. Analysts polled by Thomson Financial/First Call had expected revenue of $241.13 million and earnings of 8 cents a share.

For its full fiscal year 2003, BEA reported total revenue of $934.1 million, compared with $975.9 million for fiscal 2002, a decrease of 4%, a smaller-than-expected drop. The company had GAAP net income of $83.9 million, or 20 cents a share for the year, well below Street expectations of 27 cents a share.

BEA's flagship product is the WebLogic application server, software that enables companies to develop and deploy Web-based applications. Because the market for application servers is becoming commoditized, BEA is attempting to broaden its offerings. BEA's integration product, for example, was launched early in the second quarter, and by the fourth quarter had produced $20 million in license revenue, Chuang said.

Nevertheless, analysts are cautious about BEA. Brueschke cited competition from


(IBM) - Get Report



(ORCL) - Get Report

as well as from open-source application JBoss, and noted that "BEA faces execution difficulties as it moves beyond its core product into the integration space."

In an interview after the announcement, Chuang said that BEA has landed a major contract with

General Electric

(GE) - Get Report

, a company known to have experimented with open-source rival JBoss in its supply division. "We support open source software, but we are addressing very different markets," Chuang said. BEA's reputation for reliability makes it a much better choice for mission-critical applications, he said.

Although Chuang would not divulge the size of the deal. A source said it was valued at about $1.2 million.

BEA has attempted to add integration capabilities before, Brueschke said, but stumbled. This time, the company is attempting to hire people with integration expertise from competitors, but "there doesn't seem to be a coherent group (in charge of the effort) inside," he added.

Cheng Lim, an analyst with Fulcrum Global Partners, said BEA is reorganizing its sales force to bolster its integration efforts, "but we believe

that will cause disruptions that will likely result in extreme conservatism in guidance, which will pressure BEA's shares."

Fulcrum does no investment banking.