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We haven’t covered BEA Systems (BEAS) for many years, but did follow them pretty closely during their ascendancy back in the 1999’s. Ironically, their very success made them somewhat uninteresting to investors for a few years because they reached $1B in revenues so fast they were left with few meaningful growth prospects and had to work hard to replicate the same level of success each year.

Recently we just started to become a bit more interested in the company and started to look at them more closely again. They company just reported and the results disappointed most of the analysts who have been recommending the stock the last few quarters.

We’ve been out of the loop for some time so all the minutiae are lost on us. From our point of view the results and near-term guidance was pretty much inline with what we would have expected. BEA is a fairly large and complicated company with enough moving parts to defy easy analysis. A few million dollars either way should not make much of a difference.

During their call, management talked about SOA moving out of the experimental phase and into mainstream enterprise deployments. We agree that SOA is au courant but disagree that this is a recent fact. We would observe that mainstream market adoption started a few quarters ago in our view and has probably been driving BEA results since then.

Claims about the business of SOA being driven by the business rather than I/T seem doubtful to us. BEA has fielded a BPM product that might be touching there but we have yet to look at it in detail.

Analysts are out today with downgrades citing a range of reasons including the point that BEA is losing market share to Oracle and IBM. We can’t refute the claim but we don’t believe it. BEA does have a challenge in that customers have limited resources and Oracle has forced many of them to allocate a significant portion to navigating the Fusion path to reach some converged application architecture. IBM, Oracle and BEA have all failed to attract new generations Web 2.0 technology developers into their fold.

They company spent quite a bit of time talking about their new generation products like SOA360 and Workspace360. They are also focused on creating fine-grained components of their functional products that sounds sensible. The idea of unifying endeavors of development in Eclipse, business process management and application management with OpenView is interesting but hard to visualize without more concrete information and code.

Management touted new technology (Guardian) that sounds very similar to the IBM autonomic computing initiative which as been around for quite some time with limited impact.

One emerging thing that is interesting is the increasing SOA and related software content in the network layers. BEA talked about some deals and has been working in the communication area for some time. Their micro service architecture is said to allow very small implementations of SOA to be driven all the way to the edges of intelligent networks.

So what’s for real in this network infrastructure area? Does it help explain why Oracle bought Portal Software? We know SIP is becoming real and creating new disruptive applications. Plenty of work is going on to drive 3G and IPTV application networks.

We believe software infrastructure that reaches out from behind a virtualized infrastructure behind the firewall to deliver service-enabled applications out to devices at the edge of the network will be a very promising place to be. We just can’t yet say that what BEA doing is going to really get them there.

So what is BEA worth?
We took the time to punch some rough numbers into our long-term valuation model and came out to about where the stock is trading now, $14. We will publish the model later on but our assumptions included a 15% long-term growth rate, operating margins of 12-15%, a 30x earnings multiple and a 15% discount rate.

In conclusion, we can see people got ahead of themselves on BEA, which seems like a company that only just now is hinting at some interesting things. Corporate portals and the Plumtree acquisition certainly did nothing for us. We have yet to delve into many of the newer products but our nature is skeptical. For us, this is something that could be an interesting situation a few months from now depending on what the company does.

So we would advise people to focus on other things now and stay tuned for more information on BEA as we figure it out. Our best bet on the M&A side is that HP buys the company and puts Alfred in charge of their overall software business, much as IBM has done with Steve Mills. (HP are you listening?)

Disclosure: Author has no position in BEAS

See: BEA Systems F3Q07 (Qtr End 10/31/06) Earnings Call Transcript

BEA 1-yr chart:

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Source: Reassessing BEA Systems