Updated from Nov. 13

BEA Systems

(BEAS)

was down as much as 10% Friday on news that license revenue in the third quarter was somewhat disappointing.

BEA, a maker of middleware that allows business software applications to work together, was downgraded by Robert W. Baird and CE Unterberg, and was the subject of mildly negative comments by other sell-side analysts as well, following the company's earnings report Thursday afternoon.

Revenue in the quarter was in line with expectations -- up 8% year over year, but the company warned that its fourth-quarter results could fall short of estimates.

In recent trading shares were off $1.37, or 9.4%, to $12.78.

The San Jose, Calif.-based software company reported GAAP net income of $29 million, or 7 cents a share, in the fiscal third quarter, which ended Oct. 31. That compared to net income of $24.7 million, or 6 cents a share, in the same period a year earlier, according to generally accepted accounting principles.

Excluding charges, BEA said it earned pro forma net income of $34.1 million, or 8 cents a share, in the third quarter, compared to pro forma net income of $29.6 million, or 7 cents a share, a year earlier. Analysts polled by Thomson First Call were expecting BEA to bring in third-quarter earnings of 8 cents a share.

Third-quarter revenue rose 8% to $252.1 million from $234 million a year earlier. Analysts were expecting revenue of $250.7 million, while the company's guidance called for revenue ranging from $246 million to $253 million.

BEA posted license revenue -- a measure of new software business -- of $128.3 million, compared to $126.1 million a year earlier, but Wall Street was expecting more. Estimates by analysts ranged from about $129 million to $134 million in the third quarter.

BEA targeted fourth-quarter revenue to range from $260 million and $270 million, vs. the consensus estimate of $268.5 million. The company is targeting fourth-quarter pro forma earnings to range from 8 cents to 9 cents a share, while analyst estimates sit at 9 cents a share.

One area of concern appears to be the company's business with the federal government, which dropped 25% sequentially, from $20 million to $15 million, although it was up by about $1 million year over year. In a call with analysts, CEO Alfred Chuang said at least part of the revenue wasn't lost, but pushed out, and could well reappear within the next few quarters.

But analyst Trip Chowdhry of Midwest Research, said rebuilding the business will be difficult. According to Chowdhry, the company lost a key ally in the federal government when Mark Forman, a top IT executive, resigned to start a business with former BEA Chairman Bill Coleman. Additionally, parts of the federal government are upgrading to

Oracle's

9i database, which includes an application server. Although use of the app server is optional, some departments are choosing to activate it instead of BEA's competitive product, Chowdhry said in a note to clients.

Midwest Research does not have an investment banking business.

Earlier this year, BEA moved beyond its core application server market, which is facing more competition as it matures, into application integration and development, a bold and potentially risky move.

"It's going to be tough to penetrate already existing markets," said Erick Brethenoux, an analyst at Lazard Freres & Co. "The integration product is an issue. It's not mature enough to compete against

webMethods

(WEBM)

and these other guys."

Brethenoux, who has a hold rating on BEA, said the company needs to tap its nearly $1.4 billion in cash and short-term investments to buy a company because its app server market is going down and developing products in-house has never been the company's strength. His firm hasn't done any banking with BEA.

Chuang acknowledged integration is a new field for the company. But he noted BEA is selling integration as part of a larger platform that includes its application server, portal and other products -- a strategy he said pure-play integration providers are mimicking.

Staff Writer Bill Snyder contributed to this report