BEA Systems, Inc. Q1 2007 Earnings Conference Call Transcript (BEAS)

May.18.06 | About: BEA Systems (BEAS)
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BEA Systems, Inc. (BEAS)

Q1 2007 Earnings Conference Call

May 17, 2006, 5:00 p.m. EST

Executives:

Kevin Faulkner, Vice President, Investor Relations

Alfred Chuang, Founder, Chairman, Chief Executive Officer

Mark Dentinger, Chief Financial Officer

Analysts:

Sarah Friar, Goldman Sachs

Terry Tillman, SunTrust Robinson Humphrey

Adam Holt, JP Morgan

Heather Bellini, UBS

John Rizzuto, Lazard Capital Markets

Operator

Good afternoon. My name is James and I will be your conference operator today. At this time, I would like to welcome everyone to the BEA First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After your speakers' remarks, there will be a question-and-answer session. Operator Instructions. I will now turn the call over to Mr. Faulkner. Sir, you may begin your conference.

Kevin Faulkner, Vice President, Investor Relations

(Technical difficulty -- Microphone inaccessible) the April 30, 2006. Please note we've posted our earnings press release on our website at BEA.com. Statements made in the course of this conference call that are not of historical fact are forward-looking statements, including any statements regarding the plans, goals, strategies, opportunities and objectives for our business. In addition, statements that include the use of terminology such as “may”, “will”, “expects”, “plans”, “estimates”, “continue”, “predict”, “growth” or other comparable terminology are forward-looking statements.

Forward-looking statements also include statements regarding our financial guidance, including expected revenues and operating margins in our second quarter and any statement that could be construed as guidance regarding our future financial performance, momentum and future adoption of SOA and BPM, BEA's positioning in the SOA market, future customer results or implementations of our products, future product releases and any statement of assumptions underlying any of the foregoing.

Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contemplated by the forward-looking statements. Such factors include those factors to be discussed by Mr. Dentinger today and those detailed in an Item 1A – “Risk Factors” on pages 17 through 32 of BEA's report on Form 10-K for the fiscal year ended January 31, 2006, and similar disclosures in subsequent SEC filings. The forward-looking statements and risks stated in this conference call are based on information available to BEA today. BEA assumes no obligation to update them.

BEA reports its results on a non-GAAP basis in addition to reporting results under Generally Accepted Accounting Principles. BEA's non-GAAP measures exclude the impact of certain acquisition-related charges, employee stock option expense, net gains or losses on investments, facilities consolidation and other non-recurring charges, and assumes a tax rate of 27%.

A full reconciliation to describe the difference between our non-GAAP and GAAP financial statements can be found in our earnings press release for this quarter, which is posted on the News and Investor Relations pages of our website at BEA.com.

Now I would like to introduce from BEA, Alfred Chuang, who is Founder, Chairman and Chief Executive Officer, and Mark Dentinger, Chief Financial Officer. Alfred and Mark will make some opening remarks, and then we will take your questions. With that, I am pleased to introduce and turn the call over to Alfred Chuang. Go ahead, Alfred.

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Alfred Chuang, Founder, Chairman, Chief Executive Officer

Thanks, Kevin, and good afternoon, everyone. We are very pleased to report first quarter results towards the high end of the range of expectations that we set on the last earnings call.

We continue to see strong SOA momentum in the marketplace, and BEA is the only company with a complete SOA platform. Our sales force is very enthusiastic about AquaLogic product line, which continued to make a significant contribution to our revenue. In Q1, we saw growing momentum in emerging growth areas such as China, India and Latin America.

In addition, the license revenue growth that we have delivered over the last four quarters turned into operating leverage, as demonstrated by improved operating cash flow and non-GAAP operating margin. I am very optimistic about BEA's business.

So, let me give you some details of our Q1 performance first. Revenue was $323 million, up 15% year-over-year and nearly at the high end of our guidance. License revenue was $132 million, up 14% from a year ago. And that is also near the high end of our guidance range.

Service revenue was $191 million, including in that $151 million of maintenance revenue, which is also up 17% from $130 million, a year ago. Customers buying BEA technology in Q1 included the China Construction Bank, China Telecom, Delta Dental, Genentech, Staples, Toyota Motor Sales, United Healthcare and the US Air Force.

GAAP operating margin was $34 million. Non-GAAP operating profit was $60 million. Non-GAAP operating margin was 18.6%, which is also above our guidance range. Cash flow from operations was a record $102 million, up 33% from the $77 million that we did a year ago. Deferred revenue is up $58 million compared to last year, and now stands at $365 million.

So now let me turn to guidance in Q2. Based on current business conditions, we forecast Q2 total revenue to be in the range of $330 million to $340 million. We expect Q2 license revenue to be in the range of $132 million to $136 million. We expect year-over-year non-GAAP operating margin improvement again in Q2. So later on in the call, Mark will give you more details on our financial performance and also our Q2 guidance.

Now, let me first turn to business. This was a fairly typical Q1 for BEA. We signed 17 million deals -- $1 million and above license deals. The average size of our $1 million plus deals was about the same as it was a year ago. The total number of license deals signed in the quarter was 2,450, which is up by about 200 deals compared to last year's Q1.

Geographically, the Americas did well, but saw some seasonality in their large deals. Our Federal Government business did very well in the quarter. We recently received Common Criteria Certification for the WebLogic Server. We expect to receive certification for the other BEA products. This certification is a requirement for certain projects, specifically in the Federal marketplace.

EMEA had a typical Q1, other than some isolated performance inconsistency in a single country. The Asia-Pacific region had a great quarter, with particularly strong performance in emerging growth areas like China, India and Southeast Asia. We see huge potential in these emerging markets, and we are increasing our investments there accordingly.

AquaLogic had an excellent quarter. AquaLogic license revenue not only grew year-over-year, but it also grew sequentially and again represented more than 10% of our license revenue. Nine out of the $17 million plus deals included AquaLogic products. We signed our very first standalone $1 million plus license deal for the AquaLogic User Interface -- User Interaction products in Q1. Once again, our largest AquaLogic User Interaction buyer was a net new customer to BEA.

In Q1, we continued to make progress on our key product initiatives. As we have discussed at our recent Analyst Day, our growth strategy for this year focuses on SOA and our WebLogic and AquaLogic product lines. In addition, we are pursuing future growth opportunities by extending application infrastructure into emerging areas.

So, let me give you some highlights on our products and also our services. We believe SOA will be one of the key drivers for IT spending over the next few years. We see confirmation of this trend from many of your reports, as for other industry observers. A very recent Gartner report stated that our multiplatform AquaLogic strategy is likely to accelerate our growth and that AquaLogic has exceeded Gartner's optimistic expectations.

SOA will be the dominant architecture for the next generation of IT systems. Our customers are using SOA because it allows them to build applications that were not possible before. The move to services-oriented applications allow customer to orchestrate business processes very simply and very seamlessly across all of their applications. It allows them to deliver a wide variety of content to any type of devices.

It also allows them to offer hosted applications that can be accessed remotely on a timesharing basis. SOA allows customers to unlock the value of their package and legacy applications. We expect these trends to continue at the package application, as software as a service provider moved in this direction to service our mutual customers.

A key reason BEA is considered a thought leader was sum up very well by the editor of the Seattle Magazine. He said, if SOA really takes over, the software that link applications together rather than applications themselves will become the most important strategic decision that Seattle can possibly make. And we agree with him completely.

Our AquaLogic product and strategy are based on the idea that customer want the ability to build SOA application that embrace all of their existing applications, whether it is on the mainframe, client server, web, and the flexibility to use any technology to build new applications.

AquaLogic delivers a cross-platform support for critical SOA tasks like transforming and routing messages, registering and managing web services, integrating data, managing security entitlements, automating business processes, and also exposing composite applications as portals on fixed and mobile devices. BEA is perfectly positioned to take advantage of the momentum of SOA. BEA is ahead of everybody else in helping customers move to SOA, with the industry-leading SOA platform of products and services.

Let's talk about BEA's products and services and how they are serving the SOA marketplace. First, let's talk about our core product: WebLogic Server, the platform for building custom web applications and services, holds the top three SPECjAppServer 2004 benchmark. These benchmarks not only are very important to our customers, but they demonstrate WebLogic's superior performance and also WebLogic's superior price performance. WebLogic works, and improved performance make WebLogic an easy choice for reducing customers' total cost of ownership for IT projects.

Our recent innovations go beyond performance to make WebLogic the most efficient and manageable app server in the marketplace. WebLogic delivers a superior enterprise-grade kernel for high availability and reliability with unique features like hot swappable deployment, wide area network failover, self-tuning and optimization. Our new WebLogic Diagnostics Framework provides dynamic diagnostic and monitoring data.

JRockit 5 is the only Java virtual machine in the marketplace, with built-in tools for memory leak detection and runtime analysis to isolate the deepest, hardest-to-find operational problems.

And these are just a few examples of the innovative features BEA has recently introduced. The bottomline is simple, WebLogic Server offers the best performance, the best price performance and the best developer efficiency and the best post-deployment manageability of any application server on the market today. For our customers, that adds up to reduced hardware, development, maintenance and management costs.

Customers and industry observers are recognizing WebLogic's value. WebLogic recently won the China Information World 2005 Editor's Choice award, the China Software World’s 2005 Golden Software award and the Java Developer’s Journal Readers' Choice Award for best application server for SOA and Web services.

We also continue to innovate in other areas of our WebLogic product line. In Q1, we began betas on the 9.2 versions of WebLogic Server, Portal and also Workshop. And in a recent survey of some of our biggest customers, 70% said the portal is key to the SOA strategy. This confirms what we have been saying for years -- portal is what the end user sees and it is how customers are defining their projects.

WebLogic Portal 9.2 is a major upgrade. It simplifies the production and management of custom service-oriented portals. Portal 9.2 embraces SOA with market-leading support for standard base features, portals as part of its unified portal framework.

A new community framework simplifies portal membership, management and end user production of role-based portals. Other few features focused on improved development, improved deployment and also lifecycle management.

WebLogic Workshop 9.2 now features Eclipse support and actually won the EclipseCon Best Commercial Tool award. As the WebLogic developer base has moved to Eclipse, BEA supports them in that choice. The WebLogic family serves SOA by providing a powerful and efficient platform for building and exporting customer web services.

In Q1, our WebLogic revenue grew year-over-year faster than analysts are projecting the market to grow. We believe that WebLogic can continue to be a growth product for BEA.

Our second product initiative is AquaLogic, our service infrastructure product line for SOA. In Q1, AquaLogic once again contributed more than 10% of our total license revenue. AquaLogic's performance was driven by our market-leading service bus technology.

AquaLogic Service Bus has been getting great reviews. BEA was the best-positioned company in the most recent Forrester ESB report. AquaLogic Service Bus also received first place in the 12th Annual Well-Connected Award from Network Computing Magazine.

Based on an extensive evaluation of eight different ESB suites, BEA scored first overall and scored first place in seven out of nine evaluation criteria, including routing, orchestration and price.

We continue to innovate and expand our AquaLogic product line. This quarter, we shipped a new version of AquaLogic Data Services Platform, two new products in our AquaLogic User Interaction line, and added the AquaLogic Business Service Interaction product line with Fuego, a recent acquisition, as the foundation.

Here are some of the themes -- key themes that we see as customers use AquaLogic to implement SOA strategies. Customers are looking to improve organization agility and improve productivity. A good example of that would be insurance companies, accident funds and also AFLAC, as well as retailers like Staples, have built portals for their agents and customer service reps using AquaLogic Data Services and User Interaction. UnitedHealth Group is deploying AquaLogic in their call center and plans next to deploy in their extranet, which will reach about 5 million users.

These portals have reduced costs, streamlined operations, and improved customer experience. Staples believes that their portal built on AquaLogic translate to significant savings in operation costs. So for a retailer, that's a very, very important thing. This portal generates 2 million hits a day from Staples sales associates. Customers like Pfizer, Applebee's and Max Hogan (phonetic) have used AquaLogic for executive dashboards, aggregating many data for multiple sources.

In Q1, we extended our AquaLogic product line with our Business Service Interaction product with Fuego as the foundation. During Q1, we acquired Fuego to supplement BEA's technology and skills in the BPM marketplace. Fuego specializes in human-centric BPM to augment BEA's existing system-centric BPM products. Fuego is already an OEM partner for our AquaLogic User Interaction product, reducing integration complexities for us.

In fact, all of our integration technology today, BPM, Service Bus, Data Integration and WebLogic Integration, now all work together and can be accessed through a single BPM studio at the common wall in the environment.

The BPM marketplace is very hot. And this acquisition has been very well received. In its review of the Fuego acquisition, Forrester said, by acquiring Fuego and finding synergies with its own integration-centric BPM features, BEA will be in a good position to capitalize on BPM for SOA development, deployment and management.

AquaLogic Business Service Interaction won the Network Computing Well-Connected award for best BPM suite and is in the Leaders' Corner in Gartner's latest BPM Magic Quadrant. Our BPM customers, First Horizon and Perot Systems, presented our technology at a recent Gartner BPM Summit and it has received great reviews. Other customers for the new AquaLogic Business Process Suite include American Airlines, Consumer Source, Pratt & Whitney and Banco Unicredito Milano. Our sales force, customers and analysts are all very excited about our newly expanded BPM capabilities.

Our services organization also plays a key role in expanding our SOA capabilities. In Q1, the consulting organization rollout three new services to assist customer in addressing the top inhibitors to successfully implement SOA. Our new mission-critical support offering, internally we call MCS, continues to grow and provide important competitive differentiation. MCS was cited as the key reason by a major U.S. bank who recently replaced 500 CPUs of our competitors' product with WebLogic. MCS also opened doors to new project areas for us at a major European taxation authority.

So beyond SOA, BEA is also extending application infrastructure into new use cases to build a foundation for future growth. We have now completed more than 40 WebLogic Communication Platform pilots and proof of concepts. And we are tracking more than 100 active engagements.

In Q1, we received initial orders from several customers, as well as additional capacity orders from two deployed U.S. Tier 1 carriers. This quarter, we're hoping to have a WebLogic Communication Platform partner synergy strategy with a targeted vertical approach. We now have a broad range of WebLogic Communication Platform partners in end-user application such as voice and unified messaging services, multimedia services, push-to-talk, gaming, media resources, as well as enterprise applications such as provisioning, service activations, integrated voice response, call center and IP-based PBXs.

This quarter, we also opened a third telecommunication technology center in China to build and localize products for the Chinese market. The team of more than 100 engineers is initially focused on 3G and IMS technologies. The team is already actively engaged with two local and four international network equipment providers and also have three different operators for the initial trial phase of our products.

This is a market with huge potential. The top two carriers alone now have more than 400 million wireless subscribers. And that number is growing at a 30% compound annual growth rate over the last four years. And it keeps on going.

Carriers in the marketplace are looking to extend their revenue through value-added services and developing new voice and data services. Carriers are awaiting official award of the new 3G license in China and they are starting IMS program trials and focusing on creating unique and differentiated value-added services.

WebLogic Real Time is a new technology for very high-performance computing environments like investment bank trading invest, where low latency is critical. Until now, latency issues meant that Java was not considered appropriate for these kind of use cases. We had our first two sales of WebLogic Real Time Server this quarter. It's being implemented in a trade settlement application at Bear Stearns. WebLogic Real Time delivers an improvement in Java latency that opens the possibility for many future use cases.

In our RFID product line, we released the latest express and premium version of our WebLogic RFID Edge Server. In addition, BEA and HP announced a partnership specifically around RFID, focusing on four key areas: retail operations, compliance solutions for suppliers, reusable asset tracking, and also for supply chain.

Now before I turn the call over to Mark, let me summarize. Here is what I see as the key themes of the quarter. First, BEA delivered our fourth consecutive quarter of year-over-year license revenue growth and our second consecutive double-digit year-over-year license growth rate.

Second, license revenue growth turned into operating leverage, with record operating cash flow and improved non-GAAP operating margins. Third, results that were driven by strong organic growth, in particular from our new AquaLogic product family for SOA, supplemented by solid contributions from our acquisitions.

Now let me turn the call over to our CFO, Mark Dentinger, for more details on Q1 performance and also our guidance. Mark?

Mark Dentinger, Chief Financial Officer

Thank you, Alfred. I remind everyone that our income statement is presented in two formats, one under Generally Accepted Accounting Principles, or GAAP, and the other in a non-GAAP format. Our non-GAAP operating statement excludes certain non-cash and/or nonrecurring income and expenses, including those mandated by FAS 123R, which we adopted this quarter. Most of this discussion references our historical performance and forward-looking guidance in our non-GAAP format. Where GAAP numbers are discussed, I will make the distinction.

Revenue for the quarter was $323.2 million, up 15% year-over-year. License revenue was $132.4 million or 41% of total revenue, and services revenue was $190.8 million or 59% of total revenue. The largest component of services revenue, customer support, was $150.8 million, a 17% improvement compared to last year's Q1. Consulting and education revenues were $40 million in Q1, up 10% from Q1 of last year.

Geographically, our Americas region generated 54% of our Q1 revenue and our international business contributed 46% of total revenue. The Americas contribution was 4 percentage points higher than in Q1 of last year, in part because the predecessor entities of our business integration division, which were not part of BEA last year, currently generated a large portion of the revenue in the United States.

Internationally, our EMEA business contributed 31% of total revenues, a 4 percentage point decline from a year ago, and Asia-Pacific was 15% of revenues, even with Q1 of a year ago.

Q1 total license transaction count of 2450 was approximately 9% higher than last year, and our average transaction size increased by approximately 5% compared to last year. For Q1, industry vertical performance was as follows: Telco, 32% of license revenue; services was 14%; banking and finance 13%; and government was 12%. Other verticals were individually less than 10% of license revenues for the quarter.

Let me now move on to costs and expenses. Non-GAAP cost of licenses was 5.5% of license revenue for Q1, up slightly from 4.3% in Q1 of last year. Cost of services was 31.8% of services revenue, which represents a one point plus margin improvement over Q1 of last year. Most of the services margin improvement can be attributed to a mix shift towards our higher-margin customer support business versus lower-margin professional services.

Total operating expenses for Q1 were $195.2 million, or 60.4% of total revenue, compared with $170.7 million in Q1 of last year, or 60.6% of total revenue. Sales and marketing expense was 36.4% of total revenue in Q1, compared to 36.9% last year.

R&D expense was 15.8% of revenue in Q1, compared to 14.3% of revenue in Q1 of last year. Most of the year-over-year R&D percentage increase is due to an interruption in our funding arrangement with Intel, which is currently being renegotiated but is not yet completed.

G&A expenses at 8.2% of revenue in Q1 were down from 9.4% of revenue last year. Part of the G&A percentage drop was due to $3 million incurred in last year's Q1 for completion of our initial Sarbanes-Oxley Section 404 certification and legal fees associated with resolving certain patent litigation matters.

Our Q1 non-GAAP operating profit was $60.1 million, a $9 million improvement from a year ago. Expressed as a percentage, Q1 operating margin was 18.6%, up about half a percentage point from a year ago.

As a result of reduced interest expense on the debt we retired, our non-GAAP Other Income and Expense, or OIE, increased to $3.8 million during Q1. After completing a restructuring of our international subsidiaries during fiscal 2006, our non-GAAP tax rate was reduced to 27% of pretax non-GAAP income in Q1. Prior to Q1, our non-GAAP tax rate was 30%. I will discuss our forward-looking expectations for this area in my comments on guidance.

After making the previously mentioned non-GAAP adjustments, first-quarter net income on a non-GAAP basis was $0.12 per share or $46.7 million. Our Q1 results would have been approximately 3% higher in total revenue, 2% higher in cost of revenues and 2% higher in operating expenses if we had translated the current-quarter results at currency exchange rates in effect last year.

We were also profitable on a GAAP basis during Q1, with GAAP earnings of $0.09 per share, compared to $0.08 per share in Q1 of last year. In Q1, FAS 123R added $12.7 million to our GAAP expenses, but this was more than offset by the combination of an $11.8 million non-operating gain, mostly from selling our investments in Wily Technology and UL Systems and our improved operating profitability.

Our press release provides a full reconciliation and description of the differences between our GAAP and non-GAAP results. Our GAAP tax rate for the quarter was 28.4%, which represents our expected intermediate term GAAP rate of 29%, reduced by about a half point for certain discrete Q1 items.

Now, let me address our balance sheet. Our financial position continues to be very strong, with cash and short-term investments of $1.3 billion as of April 30, 2006. Cash generated from operations for the quarter was $102.4 million. DSO for the quarter was 68 days, two days lower than last year and below our target range of low to mid-80s.

Deferred revenue increased $58 million from last year and now stands at $365 million. Historically, our deferred services balance tends to decrease slightly during the first three quarters and increase significantly in Q4, principally as a result of the timing of support contract renewals. Changes in deferred license revenue are less predictable and the balance fluctuates as a function of the timing in terms of transactions.

During Q1, we retired an additional $210 million of face value of convertible debt due in December of this year, and as of April 30, 2006, $255 million of the convertible notes remain outstanding. We may retire this debt early if we can do so at attractive prices.

Let me now move on to headcount. Total headcount increased by 140 during Q1, and we exited the quarter with 4,018 employees. Of the net increase, 92 people joined BEA when we acquired Fuego in March. We plan to selectively add headcount during Q2, with a focus on supporting our new product initiatives in the highest-growth areas of the business.

I would now like to make several comments on GAAP and non-GAAP financial guidance. The following comments and guidance are forward-looking statements, as are any other comments about our future financial and product performance. You should review our recently filed Form 10-K for the year ended January 31, 2006, which contains important risk factors that could cause actual results to differ from those contained in these forward-looking statements.

Additionally, product transition, seasonality factors, uncertain customer buying patterns and concentration of large deals, especially towards the end of our quarter add to our revenue volatility and make it hard to predict revenues in future quarters.

Our comments and guidance are based on current business conditions and information we have as of today's call and we caution investors that numerous factors such as the risk factors discussed above could cause business conditions and customer buying patterns to change significantly. We assume no obligation, however, to update our guidance or comments on future performance. If we do update our comments and guidance, it would be BEA's policy to do so through appropriate public disclosure.

In determining our guidance, we are not assuming any significant change in the global economic climate or IT spending levels in the near-term. Based on these factors and current business conditions, we anticipate that revenue in the second quarter will be within a range of $330 million to $340 million. At this revenue range, we expect to report non-GAAP operating margins of 18.5% to 19.5%. And we anticipate the distribution of license and services revenue to approximate 40% and 60%, respectively.

Interest and other income is anticipated to be approximately $5 million as a result of our reduced debt balance. And shares outstanding are expected to increase $3 million to $5 million from their Q1 levels before any stock repurchases. As I mentioned earlier, our non-GAAP Q2 tax rate is expected to be 27%.

For those of you modeling us on a GAAP basis, we anticipate the differences between our GAAP and non-GAAP earnings will remain significant in future quarters. At the revenue levels previously mentioned, our Q2 GAAP operating margins are expected to be 10% to 11%, and we are forecasting a Q2 GAAP tax rate of 29%. Thank you for joining us today, and now let me turn it back to Alfred.

Alfred Chuang, Founder, Chairman and Chief Executive Officer

Thanks, Mark. Despite some typical Q1 seasonality, BEA delivered a double-digit year-over-year license revenue growth rate for the second consecutive quarter. License revenue growth started to turn into operating leverage. Our non-GAAP operating margin improved by more than half a point, and operating cash flow grew by 33% year-over-year. We are expanding our performance lead, delivering innovative new products into growth markets such as voice, services and Video over IP and SOA.

We are already seeing significant revenue contribution from new product lines, especially around AquaLogic, and we believe the growth markets addressed by these products will deliver for IT spending -- will be drivers for IT spending over the next several years.

With that, now I'd like to turn the call back over to Kevin and open it up for questions.

Question-and-Answer Session

Kevin Faulkner, Vice President, Investor Relations

James, we are ready to take some questions.

Questions & Answers

Operator

Thank you sir. Operator Instructions Your first question is from the line of Sarah Friar from Goldman Sachs.

Q - Sarah Friar

Good afternoon everyone, good quarter. Alfred, you talked a little bit about the server and the fact that it seems like we are progressing nicely here and that you had some deals in the quarter. But could you help us think about the size of what a true WLCP rollout could be? Are we talking kind of multimillion dollars? And how do you see those deals starting to come in as we go through the rest of this year?

A - Alfred Chuang

Sure. Sarah, obviously, that is a new product area for BEA, and also in some ways, a new experiment for our customers. Historically, the telecoms build these types of complex network applications all in a custom fashion in-house. And I think as the world change, they now have to use center-based hardware, which is a more center-oriented computing server, and also center-based software. So, we are penetrating well in that marketplace. So, several things that we're doing; one is, we will continue to do the major pilots for these kind of Voice over IP and multimedia-type technology for the U.S. and the European companies. And on top of that, we have a special effort going on, like what I mentioned on the earlier part of the comment, that we have put together a 100-person, which is still growing, special development center just for the Telco marketplace for China, which they have an enormous opportunity as they are switching from 2G into 3G in this phenomenal growth rate, plus also the expansion of the wireline technology for multimedia services. So, a typical sales cycle of this product, we have discovered so far, could last as long as four maybe up to six quarters. And we started to buy a project, we expect to see some fruition of some of these projects in this year. And I believe actually going into the next year is when we will see the big, like an explosion of the marketplace, where a lot of people will be adopting multimedia technology, especially around wireless. So, I am very optimistic where this product is going to and particularly some of the emerging market of where these people are doing some very exciting things and exciting applications using wireless technology.

Q - Sarah Friar

Okay, that’s helpful. And just a very quick one for Mark, just -- I don't know if you're going to break it out, but you have the impact from Fuego in this quarter, and then maybe just looking forward for the fiscal year?

A - Mark Dentinger

No, we don't have the impact of Fuego in the quarter. It did dilute us a little bit in terms of operating contribution just because in the initial quarter, you've got expenses with onboarding it. But the acquisition of Fuego and the continuing integration of the former Plumtree unit are on plan. And we expect them to have -- both of them to become accretive or at least non dilutive within the intermediate period.

Q - Sarah Friar

Okay, but no top-line guidance?

A - Mark Dentinger

No.

Q - Sarah Friar

Okay, thank you.

Operator

Your next question is from the line of Terry Tillman with SunTrust Robinson Humphrey.

Q - Terry Tillman

Thanks guys. Alfred, I was hoping you could maybe touch on the relative opportunities of Fuego versus ESP, maybe balance the two. And what seems more actionable and what can become more material sooner than later in terms of your sales force having success selling the products?

A - Alfred Chuang

Hi, Terry. The Fuego acquisition has been a very exciting thing for our sales force. Everyone is fighting to sell the technology. I think it stems from -- I think the market just have a lot of interest in BPM period. Right now, it's sort of the killer application for SOA out there in the marketplace. So, we do have very high hopes, it’s only been less than half a quarter that we have the product. We have inertia, but no material revenue to speak of at this point in time. We have some carryover from the acquisition, but they have obviously a different type of accounting method for accounting bookings versus what is revenueable booking and we obviously have to abide by the type of restrictions that we are under as a large publicly held company. But we do -- the sign is very good. ESP, however, is a majority of our SOA revenue today. As you would expect, the very first piece of technology you must implement is the bus. And in the past, people looked at the bus very separately from the transactional environment. People buy the bus generally have very small transactions. They have one publisher, many subscribers, and only one subscriber confirms the transaction with one single publisher, more like a trading desk. But those applications have changed. In today's world, these transactions are very long-lived, very complicated you truly have many subscribers and many, many publishers that are participating in the same task. That is more the market that we're going into. It is a more general-purpose market. So, I see ESB will continue to be our key revenue driver in the next several quarters for SOA, while Fuego, in our BPM line of products will be the key lead of those deals into the Company, because it is sexy, it is easy to use, it makes sense for the end user, you see process documentation immediately and you can do process improvements. So, I think that will be more like the picture that we're going to be seeing.

Q - Terry Tillman

Okay and just a follow-up question, Alfred is, it's nice to see the improvement continuing in the Americas region. But with Europe, can you maybe highlight a little bit more or give us a little bit more color on the country-specific issue and how that can be rectified? Will that take multiple quarters, or just give us a little bit more color there? Thanks.

A - Alfred Chuang

I think in Europe, we just have a very single isolated case where they saw a huge quarter in Q4, and I think it just -- people slacked off in execution. And it is something that we are addressing as we speak. We expect that to be fully rectified within the quarter itself. And when you have so many subsidiaries to look at, so many activities going on, sometimes this stuff happens, there is no excuse. We should be as a company firing on all cylinders at all times. But while we are speaking of that, we did see some very impressive performance in Asia, for example, that I cannot give any more praises to our Asian team. All of the regions in Asia are just really lit up and just doing very, very well. We are seeing some 40 plus percentage improvement and growth in places like China, phenomenal growth in a place like India, these are critical emerging markets that everybody is trying to get their foot into, and we just hold an enormously strong position. So, I think in balance, I think overall in all geographies, we did pretty well. But obviously, we've got work to do. I think one particular country we are going to get it back this quarter.

Operator

Your next question is from the line of Adam Holt with JP Morgan.

Q - Adam Holt

Hi, good afternoon. My question is -- this is probably for Mark -- just to make sure I understand the guidance for the second quarter. If you look at the midpoint of the license guidance say, 134, historically, services has been flat and even down in the second quarter. That would imply a substantial increase in maintenance revenue sequentially. I just want to make sure that I'm thinking about that right and how you can comment on that?

A - Mark Dentinger

Yeah actually, Adam, if you do look at the last two full years, the Q1 to Q2 growth in services, which is a little bit down last year, but if you recall in Q1 of last year, we had a couple of compliance deals -- I believe I called them out on the call last year in Q1, which skewed the Q1 to Q2 growth in services during that period of time a little, it made the quarter-over-quarter comparison a little bit tough. But the truth is historically we have grown Q1 to Q2, not as much as that we are implying in the guidance here. But the other thing I'll comment on that is happening is, is that we are picking up some of, if you will, the deferred revenue interruption out of both Fuego and Plumtree, the predecessor entities, and that is now rebuilding back into the total services number for Q2. So, we are comfortable with our guidance for Q2 on the services front.

Q - Adam Holt

And just a question on the backlog, if I could. I know you are not going to give backlog on a quarterly basis. But you obviously exited the fourth quarter with a substantial number. Is there anything you can tell us about what flowed through Q1?

A - Mark Dentinger

Yeah, other than we -- backlog is very, very seasonal, and typically in the early part of the year -- I covered this in the analyst conference. It tends to pull during the early part of the year and it tends to rebuild late in the year. And we had a fairly typical Q1 in that regard.

Q - Adam Holt

And just one last question on the communications server. Alfred, I believe you said you’ve got a couple of orders in the first quarter. Was there any WLCP license revenue in Q1? And what would be your expectations for the ramp associated with that product on the license side over the next couple of quarters?

A - Alfred Chuang

Adam, actually, yeah we did have some license get recognized in Q1 for WLCP. And they were pretty sizable and we are very pleased with some of the things that we have seen happening. The primary factor with WLCP, which between the SIP server and also the network gatekeeper, the fundamental adoption of the technology is very different from our core technology. A lot of these technologies are associated with a lot of services with the customer. So, we can only recognize the revenue overtime. Particularly we recognize a big piece -- big chunk of the revenue when a customer takes the application into production. Those timeframe is highly controlled by the customers and their needs. They accelerate them a lot of times due to market demand, sometimes over some specific service, like one of our carriers were trying to push ringtone sales over into production before the summer, as the younger generation of people tends to buy more of these type of ringtone services inexpensively over the cellphone. So, a lot of it is driven by our customers. But we still see the typical sales cycle is at least four quarters, and it can expand up to six quarters. But I think overtime, obviously, we will have enough project seeded and they will equate itself. Now we do have some exceptional situations where, like in China, for example, it is an explosive marketplace, we have planned a budget deal with the network equipment providers. If those things go well, we can see interesting growth in revenue pretty quickly, which is what we are hoping for.

Q - Adam Holt

Great, thanks guys.

A - Alfred Chuang

Thank you.

Operator

Your next question is from the line of Heather Bellini from UBS.

Q - Heather Bellini

Hi thank you. I guess this question is for Alfred or Mark. There's been a lot of banter back and forth about what Fuego would actually contribute and people saying the Company spent $80 million, maybe we could get some color as to what the license revenue contribution was. I was just wondering, if you can't give us an actual number, could you give us an idea just of the magnitude for -- is it less than $5 million? Just so we can kind of help put some of the things that will get written tomorrow to rest, if possible.

A - Alfred Chuang

Sure, Heather, this is Alfred. After all has been said and done, a few things to remind everybody. One, it is a brand-new technology, not just for BEA, but for the world, to introduce this level of user-oriented BPM in the marketplace. So, it is a thing that I think everyone is trying to absorb what it is. Every customer wants this thing. All our sales people want to sell this thing. What we have found out is the recognizable under BEA's terms and conditions, license revenue on a quarterly run rate when the time that we picked it up was about $1 million on the license side. And the services side could vary between $1 million to $2 million, in that range. So, and our performance in the quarter was a little higher than what we saw from our Fuego standalone, even though we only had it for about six weeks. So, it was really only about in the $1 million range. We do see that this thing can yield much higher growth in the future. But that is the base of where we're looking at it at this point in time.

Q - Heather Bellini

Okay. So, you are saying license revenue was about $1 million.

A - Alfred Chuang

$1 million.

Q - Heather Bellini

And that is about what we should expect until you get a better handle on what the rev rec is of those types of transactions? Is that fair?

A - Alfred Chuang

Yeah. And I think as we -- obviously, it's just a timing issue. That is the difference of looking at what is rev rec-able and what has to be delayed. And in our rules, we are a very conservative company. So, we are only comfortable with $1 million worth of that is rev rec-able.

Q - Heather Bellini

Okay.

A - Alfred Chuang

Now, we did accelerate some of those sales. So even with only six weeks on board, we're able to get almost a full quarter of what they used to be able to get for license revenue. And I think this thing has huge potential. And it is one of these technologies that can grow exponentially.

Q - Heather Bellini

That is really helpful. And then the other question for Mark would be the 27% tax rate for the July quarter -- is that something that we could safely assume stays for the full year?

A - Mark Dentinger

Yes. We are modeling it for the full year internally. And basically, as long as the distribution of earnings from our international legal entity subsidiary continues at about the same way that we are modeling our internal plan, the 27% rate will hold, again, sans any acquisitions or unusual events. But that is how we are modeling it internally.

Q - Heather Bellini

So we should expect that as a run rate basis going forward and not see it jump back? I know this is getting way far out -- but in terms of how people are looking at it, when you look ahead even beyond the next couple of quarters, 27% would be the right run rate rather than this just being a one-year phenomenon?

A - Mark Dentinger

Yeah, we would expect it rolling into next year, but of course, you rebudget every year --

Q - Heather Bellini

Yeah, exactly.

A - Mark Dentinger

-- and you have different subsidiaries. But we are comfortable with it certainly for as far forward as we can see with some clarity, which is about the rest of this year.

Q - Heather Bellini

Okay, great, very helpful, thank you.

A - Mark Dentinger

Okay.

A - Kevin Faulkner

Okay. Operator, we'll take one more question.

Operator

Thank you, sir. Your last question is from the line of John Rizzuto with Lazard Capital Markets.

Q - John Rizzuto

Hi good afternoon everyone. Alfred, I guess what I am trying to get at here is you have introduced a couple of new service initiatives in the quarter around getting people live on SOA. When you first started to introduce your AquaLogic about a year or so ago, it was all about that whole package, coming in and do services. What is -- how can we characterize a typical SOA engagement at this stage? Is it still something that is led by services, something where you have to really pull the client through it? And at what point do you see where it becomes more of a product-driven sale where clients get to that point where they can actually start buying products first and get to the maturity level where we can kind of see an inflection point in product sales?

A - Alfred Chuang

Yeah John, first, I think that is a great question because -- I apologize if I have made it confusing for the audience, that it sounded like we are still trying to convince people that adopt SOA, that is not the case at all. You can't go from 0% to 10% of total license sales of this magnitude by using a few consultants -- a few in-between consultants that we have at the Company. BEA is a company that sells licenses -- we sell products, we sell various shrink-wrapped products that people download and we give them a license key. The majority of these sales is around today -- around SOAs on ESB. And most of those sales are totally product-driven. Our sales force sells those over any service engagement. However, the tricky part of turning into the suite sale of components of SOA products or even the entire AquaLogic suite into a company-wide adoption is a very different thing, because just as any of these other technological products are introduced into the marketplace in the first or second round, you will see departments of a company that have specific needs and they want to use AquaLogic. But our interest obviously is to turn AquaLogic into a thing more like WebLogic -- every application user.

Now this requires people to have policy, that people have some integration mentality -- clearly, we need to have some definition of how reviews will work. That takes education of the entire corporation. And that is the kind of architectural engagement that we're doing from a consultant perspective. So, we looked at our consulting -- specific consulting package services that we do today as compared to a year ago -- they are very, very kind of consulting engagement. A year ago, literally, we did more tactical SOA adoption consulting for each individual project. Today, we are trying to take these individual projects, obviously multiple of them in a single company, and try to convince the customer they should adopt the SOA company-wide. But no doubt that we are the top leader and the only SOA platform supplier within the marketplace. If we don't do it, nobody else will do it. And those are the kind of things that we believe, once we get it going, the big consulting firms and also these particular consulting firms will follow. And eventually we can relinquish that control to them and they will be able to do that. But because we own the technology, we hold some responsibility for the first round of that introduction of making the technology company-wide. And that seems to be working. These consulting engagements are very hard. And we simply don't have enough consultants to go around. But remember, this Company only have very few consultants in total, let alone look at the number of transaction deals that we actually do in a quarter. We can only touch a very few customers, particularly in this case only those that already have quite a few SOA projects installed.

Q - John Rizzuto

Okay, so you are still, then, waiting for that big point where it becomes, as you characterize it, like a WebLogic sale -- a client can come and say, I need that. I want that. Let me buy those products. So, that is still some time in the future.

A - Alfred Chuang

Well, I am waiting for big ELAs of AquaLogic. We haven't done an ELA in AquaLogic yet. So, I am waiting for a big ELA of AquaLogic, like WebLogic. And I think we don't do many ELAs in this Company.

Q - John Rizzuto

All right.

A - Alfred Chuang

I mean, when you look at 17 in the quarter for a company that knocked out $300 some-odd million.

Q - John Rizzuto

Right.

A - Alfred Chuang

But the important thing, though, is validation that the customer is adopting it company-wide. So right now, there is not one company that is not talking about not going to the SOA architecture.

Q - John Rizzuto

Right.

A - Alfred Chuang

So that is talk, right? I've got to turn that into ELAs. Once you get several ELAs going, now you have validation of big companies, fully are deploying every single new application on their SOA. Now we are talking. So we've got to transform to that base. And as the leading company who provides this technology, we must be the leading company to go through those deals first. And that's how we go.

Q - John Rizzuto

Okay. And then just one final question -- you mentioned it a little bit on this call. You've mentioned it more consistently since its release about a year ago, and that is on your service bus. And that is being the -- is it fair to say -- and that was what gained a lot of attention in the industry. It gained a lot of attention from customers. When you came out with this new ESB, it was kind of like, okay, this is a major league product, where I think the perception before that was, it wasn't really there. So, with ESB, is that -- two parts to the question -- is that really the core of what the SOA foundation is today for BEA? And then how does this compare, because we are looking at a lot of mature technologies on the service bus from IBM, from TIBCO, etc., And how are you able to compete against them or what are the advantages you have in going against these incumbents who have been around a long time building these buses?

A - Alfred Chuang

Yeah, it is an excellent question. The answer is very simple -- for every new generation of application, the technology must reinvent itself. As I have said, the old bus technology either, if you look in the case of an Mfuture (phonetic) it is a great technology, but primary use historically has always been getting data in some transaction on and off of the mainframe. And it's a very single purpose. If you look at other technology in the marketplace, the bus was primarily used on Wall Street trading, manufacturing -- again, very small packet, sometimes nontransactional, but very lightweight transactional type of technology. It takes a complete rebuild to put transactional enablement, long-lived transaction in this particular case, and massively complicate it end-to-end subscribers to a publisher type of environment, for a context bus. That's not only the bus transforming data itself. Then you get management around it, instrumentation, and have the stability to be able to mine the data. So, other products like liquid data, other things, all contribute to the growth of the bus itself. So, even though the name of the bus has been around maybe a long time, technology eventually has to be redone. Otherwise, we would have been able to take mainframe technology straight to the web and forget about Java, forget about all these new things that we have done in web services over the last five to ten years. So, there has to be a revamp of technology in a dramatic way. And I think what we're doing with the ESB -- it is a brand-new technology, specifically built for these kind of environments, particularly built for SOA for general purposes, in a very transactional-oriented world that we are in today. And so, I don't think we can't think of it as, “Oh my God, BEA is competing with people that have been around for 20 years”, because I don't think those technologies matter anymore in the world that we live in.

Q - John Rizzuto

That’s fair enough. Okay, thank you very much.

Alfred Chuang, Founder, Chairman, Chief Executive Officer

Again, I want to thank everybody for listening to BEA fiscal 2006 -- excuse me, 2007 quarter one conference call. And I look forward to talking to all of you in our next earnings call. Thank you.

Operator

This concludes today's BEA first quarter results conference call. You may now disconnect.

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