BEA Systems F4Q07 (Qtr End 01/31/07) Earnings Call Transcript

| About: BEA Systems (BEAS)
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BEA Systems (BEAS)

F4Q07 Earnings Call

February 22, 2007 5:00 pm ET


Kevin Faulkner - Investor Relations

Alfred Chuang - Founder, Chairman, CEO

Mark Dentinger – CFO


Todd Ricker – Deutsche Bank

John Walsh – Citigroup

Steve Ashley - Robert Baird

Heather Bellini – UBS

Peter Cooper – Morgan Stanley

Katherine Egbert – Jeffries & Co.

Sarah Friar – Goldman Sachs



At this time I would like to welcome everyone to the BEA fourth quarter results conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answers session. If you would like to ask a question during this time, then please press "star" then the number "one" on your telephone keypad. If you would like to withdraw your question press "star" then the number "two" on your telephone keypad.

Thank you, Mr. Faulkner. You may begin your conference.


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Kevin Faulkner

Thanks, Anna. Good afternoon ladies and gentleman and thank you for joining us as we discuss BEA's Systems Inc. results for the fourth quarter and fiscal year, ended January 31, 2007.

Please note we've posted our earnings press release on our website at 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 use of the 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 in our first quarter and any statement that can be construed as guidance regarding our future financial performance, potential effect of our stock option investigation, momentum and future adoption of SOA, BEA positioning in the SOA market, future customer results or implementations of our products, future product releases, future benefits of our land transaction, and any statement or assumptions underlying any of the foregoing.

Forward looking statements are subject to risks or 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 item 1A risk factors on pages 47 through 62 of BEA's report on form 10Q for the fiscal quarter ended April 30, 2006 and similar disclosures in subsequent SEC filing.

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.

Now, I'd 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'll take your questions.

With that, I'm please to introduce and turn the call over to Alfred Chuang. Go ahead, Alfred.

Alfred Chuang

Thanks Kevin and good afternoon everyone. We're pleased to report fourth quarter results that were within the range of expectation that we set on our last earnings call. Both our ecologic products and also our SOA services continue to lead key customer opportunities as SOA adoption continues to increase in scope. This resulted in excellent growth for our AquaLogic brand.

We've represented 25% of license revenue in the fourth quarter. AquaLogic and SOA continue to open doors into our competitors install basis. We improved the operating efficiency in line with the targets that we discussed at our analysis date. We continue to invest in both the park set and the field. We improved our execution and revenue capacity.

Throughout this call we'll talk more about how SOA is driving our business.

So first let me give you some details of our Q4 performance. Hotel revenue was $392 million, up 15% year-over-year. License revenue $169 million, up 8% from a year ago. Service business revenue was $223 million including $175 million of that in maintenance revenue, up 21% from a year ago.

Customers that buy into BEA technology in Q4 included our buyers from, Avis, Budget, RentACar Group, BMW, Citigroup, Genentech, Proctor & Gamble, and Reuters. Revenue stands at $449 million, up $70 million comparing to last year, and up $112 million comparing to the Q3.

So for the full fiscal year, total revenue was $1.402 billion, up 17% from last fiscal year. Licensed revenue was $573 million, up 12% from last fiscal year. Services revenue was $829 million, up 20% from last year. Services revenue included $653 of that in maintenance revenue which is also up about 20% from a year ago.

Operating cash flow was $300 million, up 5% from last year. BEA ended the fiscal year with $1.2 billion in cash, after retiring all of the remaining $255 million of our convertible debts.

Although we weren't able to match last year's blow out, Q4 was very good. As we look at our peers in the industry’s customer spending, and also in internal transitions, we believe it is prudent to expect a bit more seasonality than usual in fiscal 2008. We remain optimistic for the full year but we do expect for the fiscal year to be more back-end loaded than before.

Based on current business conditions we forecast Q1 total revenue to be in the range of $350 million to $364 million. Later on in this call Mark Dentinger will report to you on our financial performance and also more details on the Q1 guidance.

In Q4 we had strong performances in a lot of areas. Particularly in products like AquaLogic service busts and also our business process management product and also certain geographies especially in places like China, Korea, India, and France. China now represents nearly 40% of our Asia Pacific bookings. And there's no end in sight to the demand there.

We continue to work through product transitions some of which pose unusual challenge. We continue to see challenges in some geographic areas like the UK and Japan. The misses in some of these regions had a notable effect on revenue, due count and also product performance. We're working through those changes including some personnel that were already put in place to improve our performance in those regions.

In Q4 we signed $31 million plus deals, the same as a year ago. For the fiscal year, we signed 82 $1+ million license transactions, up from 78 a year ago. And it was our biggest year ever. The total number of licenses, or those received in the quarter, was 2,600, down slightly from last year's Q4 but up by 140 comparing to Q3.

Our results for Q4 and the year, across all our product lines were driven by SOA. The demand for SOA has grown rapidly as enterprises realize the high value of business transformation and optimization that transition to SOA enables.

By delivering a complete SOA platform product, BEA offers customers the best way to design and implement the SOA base IP infrastructures. SOA is the first solution that delivers standard base sharing across all the entire enterprise and we use across every platform in the enterprise and between enterprises, completely agnostic of any single technology out there.

SOA allows more speed, more control and accuracy in making business decisions. As SOA expands its scope from projects to enterprise by deployments there is a growing need for an enterprise will repository, to manage SOA assets and deliver on a profit over years.

BEA is leading the SOA market because we are the only company with a unified SOA platform. BEA is the only company with a long term vision of how SOA will expand beyond IT to drive business optimization.

SOA is driving our business across all of our product lines. And our investment in SOA consulting continues to lead deals as enterprises begin implementing very large scale enterprise initiatives throughout SOA.

BEA consulting and education grew by $30 million for the year which now represents about 21% of growth. Growth is driven primarily by helping customers to design and to employ SOA base initiatives.

We're investing in consulting. Our global enterprise accountings have partnership with the SOA to increase and to serve customers and drive license revenue. Our AquaLogic product line is the most obvious beneficiary of the SOA adoption. AquaLogic nearly doubled from 13% of our license revenue in our first quarter to 25% in our fourth.

This year, our AquaLogic brand represented 20% of our total license revenue, contributing to just over $110 million.

Theses are truly very impressive results in this first full fiscal year's product cycle. The last time we saw anything like this, of this level of excitement, was in the early days of Java or WebLogic. Projects are being funded and driven by the business, not just by the IP folks.

Our AquaLogic performance was once again led by ServiceBus technology, and also our business process-management products. And that essentially broadens the approaches customers were taking, due to integration needs, we have grown our product market, from the WebLogic integration product line, to include a service bus, BPM, and also data integration.

WebLogic integration grew slightly this year, and combined license revenue from all of our integration products was a little more than $100 million. Key integration wins this quarter included Avio, Bank of America, Signa, Dhaka Bank, and the French electric utility EDF.

As our customers’ automated business processes with our BPM tools, we continued to build the user interface through Portal. To better address this case, we recently introduced a new integration solution, called AquaLogic BPM Collaboration Edition.

Traditional BPM often focuses on automating functions that can be automated. The struggle is to address the more dynamic process challenges that require deeper contacts and collaborative work between process participants. This type of process is best supported by the combination of BPM, collaboration technology, and a rich interactive Portal framework.

Key wins in the Portal market this quarter included FedEx, Johnson & Johnson, and Procter & Gamble. Strong AquaLogic results were offset in part by mixed results in the WebLogic product line. WebLogic server performance was excellent, and it came in line with the industry analysts' projection for the IT marketplace.

WebLogic integration boosted slightly, even as the market embraces new integration technology such as ServiceBus, WebLogic Platform, and WebLogic Portal lag. We have moved our strategic focus away from WebLogic Platform to AquaLogic and SOA. So Platform lagged, if somewhat expected.

However, we did not perform as well as we had hoped in the Portal marketplace. We continue to take steps to improve our field alignment and performance in this market.

Actions taken in the second half of the last year have very quickly been effective. Our Portal business did have a strong finish. In Q4, we had our second best looking performance ever in the Portal market, trailing only last year's blow-out fourth quarter.

WebLogic Server continues to lead the market in performance, as shown by some of the recent industry and customer benchmarks. Our enhancements lead to new features which are driven by customers' needs. WebLogic Real Time is strengthening the year's position of enabling job of real time applications and continued our relentless compression of response time.

In Q4 we shipped an updated version of WebLogic Real Time that can generate maximum port time of 10 milliseconds. And this truly is amazing performance, never ever available in Java. And clearly, it's helped the customers shift away from C and C++ into the Java space instead.

The U.S. Navy has certified that we meet their real-time performance requirements to replace mainframe systems. The ability to deliver this kind of response time in Navy systems opens doors to a lot of projects in financial services, in the government, and in intelligence, that previously could only be served by a mainframe or by very low-level languages.

Also in Q4 we announced a WebLogic Server Virtual Edition. Virtualization is one of the top issues for SOA for 2007. SOA is increasing the volume of users, transaction, and data systems. System throughput and transaction capacity are becoming a bottom line.

And most virtualization products on the marketplace are designed to manage system sprawl. Ours are designed to reduce sprawl by applying intelligence about what is going on inside the system to actually reduce traffic in a virtualized environment.

As a result of that, other products can improve hardware utilization but at the cost of slowing down performance. WebLogic Server Virtual Edition is currently in alpha testing, with a scheduled release date later on this year.

Early results have shown that customers are able to double their hardware capacity utilization without any degrading performance.

This will enable our customers to virtualize their environment for the biggest, most demanding applications – something they would not be willing to undertake if virtualization required performance hits.

WebLogic Communications Platform continued to progress very well. Revenue, booking, and partner adoption, continued to grow in Q4. We have now received license revenue from 45 customers, including the majority of the world's Tier 1 carriers.

WebLogic Communications Platform costumers this quarter included French Telecom and MobiCom Austria. In addition, we now have more than 20 customers who have made multiple license purchases.

We have key solution-designed equipment and network providers, partners including Whatley, IptelTel, NEC, Nortel, Samsung, Siemens, and TelCordia. We continue hiring in our Telecom technology centers in China, in Korea, and also India. We are focusing on the 3G roll-out, adding new products to the network and bundling these products with offerings from the network equipment providers' OEMs.

Pilots are beginning at some of the carriers, particularly in China, that based on our NEP partner's WLCP bundle. Each pilot often costs more than $100 million for equipment and software. So as a result of that, we believe the carriers are highly unlikely to change technology when they move from pilot to deployment.

We are encouraged to be included in so many of these pilot projects, and look forward to receiving orders as deployment and usage grows.

And we'll always continue to upgrade Tuxedo to make it more relevant in the SOA environment, and to continue to deliver a lot of success for BEA.

Tuxedo license revenue grew slightly this year, for the second year in a row. This year was shipped what we call SALT 1.1. SALT stands for Services Architecture Leveraging Tuxedo. SALT is a native web services stacked for Tuxedo-based applications developed using an open, standard-base implementation of SOA.

We've already won a deal with the Dutch land registry, Kadaster, to use SALT in the delivery of new functionality and services to all land-owning citizens in the Netherlands.

In Q4, the year also formally launched a mainframe re-hosting program to offer mainframe shops a better infrastructure to run their mission-critical enterprise applications. These programs leverage our existing partner AquaSystem and proven methodology to natively re-host mainframe applications on the Shubada systems.

So the time has finally arrived, the mainframe is being re-hosted.

With over 120 migrations, ranging from a few hundred to 12,000 MIPS, already completed in 1997, BEA continues to offer the best, most cost-effective, the most reliable, and the modest modern way to run business-critical applications that at one point in time could only run on a mainframe.

We continue to invest in our low-cost customer-support offerings that address our broader customer base. Our Guardian support offering became generally available last week. We're very excited about the Guardian product. There were 50 customers in a Guardian data program, and the results were extremely impressive.

In particular, memory leaks are very painful to troubleshoot, and customers love the fact that the Guardian can predict and pre-empt these sorts of problems. Guardian is priced as a one-time fee for the software, which will be recorded as support revenue. In order to access the Guardian service, customers also need to be a current maintenance customer, which will improve the already high patch and renewal rates in our support business.

In addition to that, a lot of ISPs are impressed with Guardian, and they're interested in OEMing the technology to support their own support base. We're actively working on an ISP model for Guardian, which would generate license revenue for this cutting-edge approach to customer support.

In addition, we continue to expand our relationship with key partners, and during Q4, BEA and EMC significantly strengthened our alliance with a multi-million dollar, multi-year licensing agreement for WebLogic's Server to power EMC's content-management products. This agreement was reached after EMC conducted a very rigorous evaluation of competing application servers, choosing WebLogic's server as EMC's embedded runtime environment for their content-management with BEA, and computer associates enter into a strategic alliance under which CA has chosen what logic server at the application server for the IAM security offering. And BEA has selected a CA as a security partner for identity and access management.

Thomasue and Goldblatt by computers deliver. We had our largest quarter ever in terms of source revenue from the global SI and close to half of the revenue came from the AquaLogic and WLCP power line. We now have resell agreements with SP, SCSC and we are working with additional SI to adopt a technology at this level.

We have our first win with CSC this quarter. A seven figure license transaction with internet and insurance companies, which is also a traditional IBM shop.

Our partner Higher Consulting Services, opened an SOS center for excellence based totally on our technology in Lambei.

PCS plan for this share is to train 1,500 new consultants on BEA technology. Our partner Excentra anticipates opening a center of excellence also based on our technology in India this year.

There are three final business points I would like to discuss before turning over the call to Mark Dentinger.

First, I would like to announce that Tom Ashburn head of worldwide operation is retiring from his position. I would like to thank Tom for his efforts as the head of the worldwide organization for the last 2.5 years, overseeing BEA through a very important transitional period. The sales services and marketing function would now each report directly to me.

Also today, we are announcing that Richard Raffle has been promoted to be our head of OY sales. Rich has done an excellent job as well as the head of the American sales. I will congratulate him on this very well earned promotion.

Second, today BEA had an agreement to purchase a new corporate headquarter building in downtown San Jose.

And separately with active discussions to sell the 40 acres of land that we purchased in 2001, we hope to be able to announce a contract to sell that land soon. After (inaudible) expired next year, we expect to save several million dollars next year in operating expenses, from owning, rather than leasing by headquarters.

In addition, even though the transaction will liquidate the land as a loss, these transactions are expected to result in more that $50 million in positive cash flow to BEA. And we are obviously are very excited to be moving into the next chapter of BEA into a brand new building.

Third, we’re glad that the stock option review has been completed. Last week, we issued a press release to summarize the conclusion and recommendation of the special committee.

At this time, we expect to restate the financial statement from fiscal 1998 for fiscal 2007 and that will recount non cash compensation expenses on a pretext basis of somewhere between $342-390 million, with the majority of this expense relating to that made in the fiscal year 1999 to fiscal year 2002 period, which represents the calendar years 1998-2001. This has been a very difficult chapter in BEA’s history. The FCC and NASDAQ were very well kept informed throughout this process.

We are making a process to change to prevent this from happening ever again. And of course there remains to be a lot of work to be done for BEA’s finance team and also independent auditors to do in connection with the restatements.

I can assure that we are working as quickly as possible to finalize this process and become current with SEC filings.

With this chapter behind us, we can turn our full attention to looking forward and executing our business opportunities that are in front of us.

So before I turn it over to Mark, let me summarize in what I see as the key things of the quarter. First, BEA has delivered a seven consecutive quarter of year over year license revenue growth. It exceeded our target revenue growth range of 10-15%.

Second, although we can’t share the financial details at this time, BEA computing improved their efficiency of our operations.

And third, results are driven by strong unlimited growth, in particular, for AquaLogic service spots and our VPM product line.

Now let me turn the call over to Mark Dentinger, our CFO for more details on Q4 performance and also our Q1 guidance.


Mark Dentinger

Thank you Alfred. As previously discussed, our audit committee recently completed a review of our historical stock options grading practices. Because the accounting impact on current and prior period financial statements is not fully quantified, we are limiting today’s discussions to financial measures which are unlikely to change as a result of the review.

Additionally, our forward looking financial guidance will also be limited mostly to revenue measures until the restatement is complete. Revenue for the quarter was $392 million, up 15% year over year. License revenue was $169 million or 43% of total revenue and services revenue is $223 million or 57% of total revenue. The largest component of services revenue, customer support was $175 million, a 21% increase compared to last years Q4, resulting in education revenues for $48 million in Q4, up18% from last year.

Geographically, the America’s region generated 52% of our Q4 revenue. And our international business contributed 48% of total revenue. The America’s percentage contribution was even with Q4 of last year. Internationally, our EMEA business contributed 34% of total revenues, a 1% improvement from a year ago. And Asia Pacific was 14% of revenues, a one point decline from Q4 of a year ago.

Q4 total license transaction count of 2600 was down approximately 7% from last year. Up approximately 6% from Q3 of this year and our average transaction size increased by about 16% compared to last year.

Q4 industry vertical performance was as follows: Telecommunications was 22% license revenue. Banking and finance was 20% and government and services were each 14%. Other verticals were individually less than 10% of license revenues for the quarter.

Our Q4 revenue would have been approximately 3% lower if we had translated this quarters results at currency exchange rates in effect last year. With comparing Q3 of this year, our Q4 revenue would have been 1% lower translated at last quarter’s rates.

Now let me address our balance sheet. The end of the quarter with cash and short term investments of $1.2 billion and cash flow from operations is $95 million from Q4, compared with the $102 million from Q4 of last year. Year to year decline in operating cash flow was impacted by the $9 million special employee bonus we paid this quarter and $3 million in external fees associated with the stock options review.

Absent these one time effects, the Q4 cash flow would have been a record. During Q4, we repaid the remaining $255 million of our outstanding convertible debt which explains the drop in our gross cash position from Q3 despite the cash generated from operations.

DSL for the quarter was 91 days, an increase for four days from Q4 of last year. Deferred revenue increased by $70 million from last year now stands at $449 million. Consistent with our prior experience, the largest component of deferred revenue, deferred to court, historically extended the sequentially decreas during our first three fiscal quarters and increased significantly during Q4, principally as the result of the timing of support contract renewals. Changes and deferred license revenue and other deferred services are left predictable and the balance fluctuates as a function of the timing and terms of transaction.

Without addressing our overall costs and expenses, I will discuss certain expense measures and other phenomenons from Q4 to assist in your modeling. Time GAAP, other incoming and expense or OIE increased to $10.4 million in Q4 versus $1.4 million in Q4 of last year and $9.5 million in Q3 of this year. Year over year non-GAAP OIE improvement was largely the result of reduced interest expense in our lower average convertible debt balances as well as an increase yields on our investment portfolio.

On a GAAP basis, we incurred $5 million during Q4 for external expenses associated with the options review and we would likely incur a similar amount in Q1. We also absorbed additional non cash charges in Q4 associated with modifying stock option awards for departing employees and employees with expiring stock options.

With the reward modifications continuing to be required while the review is open, we expect another charge in Q1. Please note that neither of these charges is included in our pre-post tax restatement adjustment that would infect the current period following completion of the options review.

As Alfred mentioned, we signed an agreement today to purchase a building for our headquarters. As a result, we will be recording a non-cash GAAP only write down of approximately $200 million in either Q4 or Q1 associated with the impairment of the carrying value of the land next to our San Jose facility. Separately we have also begun positioning the land for a possible sale.

Total headcount this quarter increased by 34 and we exited the quarter with 4,278 employees. We plan to very selectively add headcount during the first half of our fiscal 2008 with an emphasis on our theories and divisions.

Our aggregate backlog at January 31st, 2007 is $500 million. It includes deferred revenue from unexpired maintenance contracts of $412 million, deferred revenue from undelivered consulting and education orders $23 million, deferred revenue for license orders which have shipped but have not yet met revenue recognition requirements of $14 million, off balance sheet license orders received and not yet shipped of $10 million, and off balance professional service orders received and not yet delivered of $41 million.

Aggregate backlog of January 31st, 2006 was $445 million of which $379 million was included on our balance sheet as deferred revenue.

We do not believe that off balance sheet backlog as of any particular date directly correlates to future results. Also note that our off balance sheet backlog is not subject to our normal accounting patrols for information that is either reported and/or derived from our basic financial state. Finally, the concept of backlog is not to find any accounting literature and making comparisons with other companies is difficult and potentially misleading.

I will now discuss our guidance for Q1. Following comments in guidance are forward looking statements as are any other comments about our future financial and product performance. You should review our form 10Q for the quarter ended April 30th, 2006 which contains important risk factors that could cause actual results to differ from those contained in these forward looking statements.

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

Our comments on guidance are based on business conditions today 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. We do update our comments on guidance, it is BEA's policy to do so, for 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. Finally, our comments and guidance do not address any additional costs and expenses which may have to be reflected in future financial statements when prior period results are restated following completion of the options review.

Based on these factors and current business conditions we anticipate revenues for the first quarter of our fiscal 2008 to be within the range of $350-364 million. And that the license component of revenue will comprise 36-38% of total revenue.

And as previously mentioned we also expect to incur additional expenses in Q1 for a combination of third party fees associated with conducting the options review and non-cash charges associated with modifying expiring stock option awards.

On a related point, the IRS recently offered an opportunity for our employers to satisfy the XI tax obligations of any rank in file employees who exercise mispriced stock options in calendar 2006. It is likely the BEA will participate in this program. And as a result we will incur cash charges to our financial statements during fiscal 2008 when we participate. As of this call we have not quantified the magnitude of these charges.

Thank you for joining us today. Now let me turn it back to Alfred.

Alfred Chuang

Thanks, Mark. BEA exceeded our revenue growth target range of 10-15% enabling us to include the efficiency of our operations. We're the leader in application server and most definitely the leader in SOA. And we're expanded our performance leads delivering innovative new products in the growth markets such as SOA and the next generation services.

We're already seeing significant revenue contribution from new product lines. And we believe the growth market addressed by these products will be drivers for IT spending over the next several years.

Now let me take the opportunity to open the call up for questions. Kevin?

Kevin Faulkner

Thanks. Janice, could you open the call for questions now?



Yes and thank you. At this time I would like to remind everyone if you would like to ask a question please press "star" and then the number "one" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Todd Ricker with Deutsche Bank.

Todd Ricker – Deutsche Bank

Two questions for you. First, can you give us some insight in terms of WLCP? There's been some reports that China is going to delay 3D licenses till calendar '08. Do you see this as having any impact on your business? And from a geographic perspective, it does look like Asia would leak this quarter from a growth profile. Can you give us some insight?

Alfred Chuang

Sure. This is Alfred. Two things. One, on the WLCP side, despite the delay of the granting of the 3G licenses, obviously China Mobile has proceeded with basically ensuring their own protocol for 3.5G services. We have participated in that process.

Number two, we happen to have FloatAway as a key partner. They happen to be at BEA today and I had the opportunity to spend some time with them. And clearly we did a lot of project with them as well. So the potential of the growth of that market place is expanding and right now really look boundless.

An official 3G license will be issued any time in the near future. So we're certainly not concerned with that. And the progress that we have made with all the other network equipment providers and embedding WLCP product line into their product is also really good. Pretty much, we are now with everyone who would be shipping this new generation office switches for telephone costs. So I think we are well seated for success in the overall Tel-Com networking space beyond just China. But China's potential I think is pretty boundless.

From Asia’s geographical perspective I think we remain to see challenges in Japan. We are still in the process of looking for a head of Japan and it is a position that has been vacated now for three quarters. It's a challenge for us. And Japan is not an easy place to fix. It's culturally deep in the how they do things but we are seeing things that are improving. So far the first three of the quarters, they have done very well in terms of their progress. So we do have high hopes, this is their Q4, our Q1, that they will do much better this quarter.

But other places in Asia we're seeing strong performance. India, Korea, particularly obviously China has just done a stunning job and as I said earlier, there's no end in sight of how far that market can grow into. We also saw a little bit of challenge from Australia, New Zealand that some of the deals didn't close. We expect that, we just hired a new general manager for Australia, New Zealand. We do expect improved performance in that region for this quarter also.

So I think it's unfortunate that we saw some upset in Japan that otherwise we would have had a perfect quarter in Asia.

Todd Ricker – Deutsche Bank

OK. Thanks guys.

Alfred Chuang

Thank you.


Your next question comes from the line of John Walsh with Citigroup.

John Walsh – Citigroup

Good afternoon. Do you think, Mark, if you can give us an update as far as the fall guidance that you had given from that high level 10-15% total revenue growth environment and you could have those operational efficiencies of two and a quarter basis points. If you could just update us if that still is the case and then maybe a timing expectation and when you think that efficiency can occur.

Mark Dentinger

Yeah, I'd be happy to, John. Yeah, that model is still in effect. We still have a cost structure and an investment structure that basically supports that model. We are seeing a little bit more softness than the 10-15% environment we spoke to at the analyst day last spring but that doesn't mean that the model itself is not still valid. And that basically we are following our investment structure that will support that under those outcomes for top-line revenue.

John Walsh – Citigroup

OK and if I could just get a follow up on Tom's replacement. How long has he been at BEA, I missed the name of the executive at the BEA, but how long has he been with BEA and what was his background?

Mark Dentinger

Yes. So actually, Tom was replaced by three different people so Tom, right now we have three different organizations that report to him. And the sales organization will be run by a guy called Richard (inaudible). Well Rich was at the company I believe for about four years. He came into the company to run sales operations and moved into the role to run the Americas and will now be running worldwide sales. And his background is from IBM. And running a different variety of sales will help him under the different product lines, and also in geographies like Wall Street in New York City. The services organization is run by a very seasoned guy, David Guy, that came to us as a CEO of an outsourcing company. Before that he was at Hewlett Packard. He's been running the services organization for the last two-plus years, so there will be no change there.

Also Rosanza Cohn, who has been our head of marketing since the last several months, and she will continue to be in that role. The real difference here is that they will be reporting to me directly.

John Walsh – Citigroup

Okay, thanks.

Alfred Chuang

Thank you.


Your next question comes from the line of Steve Ashley with Robert Baird.

Steve Ashley - Robert Baird

Hi, a couple of questions. First of all...

Kevin Faulkner

Steve, could we ask you to speak up just a little bit...

Steve Ashley - Robert Baird

Yeah, I'm sorry. The people's license renewal that's expected in the first quarter, was that in your first quarter license revenue guidance?

Alfred Chuang

Yes, I think we're counting part of it in our guidance, yes.

Steve Ashley - Robert Baird

And you talked about the Portal business, and you've taken some steps with product management to try to improve that. Can you give us maybe a little bit more color on what's happening with your Portal products?

Alfred Chuang

I think it's just a BEA-owned destruction problem, as we brought the BPM product line up, within the business interaction division, we clearly saw the demand for the BPM product was so stunning, it just grew so quickly, that I think our salespeople lost some of their attention on the Portal project that would otherwise pick up tremendous momentum.

So in last quarter, we really have focused on managing sales in the Portal area, and it has improved, and getting into Q1 was specifically quoted to people are selling the Portal product, that I think it will help a lot. But it was just, I think, such a demanding product on the BPM product line that it distracted our people away, from selling that level of a solution than focusing on just selling Portal alone.

Steve Ashley - Robert Baird

Okay, thank you.

Alfred Chuang

Thank you.


Your next question comes from the line of Heather Bellini with UBS.

Heather Bellini – UBS

Hi, good afternoon. I was just wondering if you could be a little bit more specific where you're seeing the weakness, and I guess Mark you just mentioned that you're seeing a little bit more softness than the 10-15% topline growth that's been talked about. So how should we be thinking about the comments that it's been back-end loaded and how that translates into a full-year growth rate?

And also, from a margin standpoint I heard you say that cost structure is still in place, but can you still get to that type of margin expansion, given the top line that you must be implying, based on your comment? Thank you.

Mark Dentinger

Yeah. The answer, Heather, is that we still can get to that margin expansion that we spoke of previously, even with the challenging top-line environment, and we're not giving up on the previous expectations for top-line environment on the year. It's just that, as often indicated, we're conceding that it may be a little more back-ended than we were hoping.

Heather Bellini – UBS

So, are you saying that...Everyone's assuming that the 10-15% is kind of a guidance range you put out there? Is that something where you're just, it's still out there? Do you think it should be more back-end loaded? I mean, how should we take those comments?

Mark Dentinger

Yeah, it's still out there. It's probably going to be more back-end loaded, and we'll have to get a little bit further into the year before we can see it and firm it up.

Heather Bellini – UBS

Okay. Thank you.


Your next question comes from the line of Peter Cooper with Morgan Stanley.

Peter Cooper – Morgan Stanley

Great, thanks very much. Actually, guys, kind-of a general question. We've got some movement in management, but it seems that every quarter, we've got an area of challenge here, like naturally, of course. Are we going to be looking for now kind-of a more defined, almost like a restructuring plan, so we get more of a steady, clean result, rather than an asterisks on results, geographically or otherwise?

Alfred Chuang

Yeah, Peter, this is Alfred Chuang. It's a great question. It's very frustrating for the company, because we're seeing places like China, Korea, U.S. Federal business, the Eastern Region in the U.S., and a variety of different places in Europe, you know: Sweden, Norway, Finland, and Denmark. These places are doing stunningly well, while the U.K. and Japan is lagging.

So we have done that. The good news is that we have, since last quarter, put one of the veterans, one of our most trusted employees to run it as a region for us. He has put a new management team in place to run the U.K., to run our partner's organization. And today, actually this morning, we just hired a guy to run Italy, and we have hired a guy to run Germany just about two months ago.

So we have overall had an opportunity to hire some very very good people from some of these very seasoned companies.

So we are expecting, I think, that near region was stabilized. We have very strong hopes that we'll be able to place the head of Japan and Japan sometime in this quarter and that really is our trouble spot. And I think with those things in place we're going to see much more linear operational excellence out of the different geographies.

It's very frustrating for us. I'm being very honest with you. And it's something that we strive to work on. And those are obvious places that we're supposed to do very well. You know, we are not supposed to see China doing 20-30% more revenue than Japan. I think that's an easy target to go fix.

Peter Cooper – Morgan Stanley

OK. And just maybe one quick follow up if I might. Heather was touching on the margin, and I'm not sure if I had heard you correctly, we had talked about a little over a year about the margin expansion and with the revenue rate here, here you say that that's still a team immobile, but given the back-end loaning, what was the, just to make sure I heard you correctly, on long term margin expansion I guess is what I'm really trying to get to.

Mark Dentinger

Yeah the long term expansion for margin is still based on the model that we disclosed last year at the Analyst Day. 10-15% improvement in the topline that should grow up two to four basis points improvement in the margin. And we are going in even with the guidance that we've issued in our verbal commentary on the market conditions as we see them in the short term, we are still sticking with that model as an objective for fiscal 2008.

Peter Cooper – Morgan Stanley

OK. Thank you.


Your next question comes from the line of Katherine Egbert with Jeffries.

Katherine Egbert – Jeffries & Co.

Hi. Good afternoon. Not to beat a dead horse but if I look at your guidance for Q1 of '08 and compared to Q1 of '07, you're basically guiding flat to a little bit down so how would, that you could get to 10-15% license curve if Q1 is flat to down?

Mark Dentinger

Yes. Again, the 10-15% is total revenue. It's not just the license. And again, as the year goes on we would expect license growth improvement as well. But even on a flat license environment, even in Q1, we would still expect some margin improvement again because the services business continues to grow very robustly and if we're selective and careful about the investment structure we can drive more margin out of that model.

Katherine Egbert – Jeffries & Co.

OK thanks Mark. And then as a follow up, what would get you over the hurdle to feel comfortable giving out some longer term, say, annual guidance?

Mark Dentinger

I think, Katherine that's a great question and we would very much like to do that. You know, we work with a lot of our peer group and we also compete a lot with our peer group. From what we're hearing of what they're doing, clearly giving us indications in how we will know the guidance in the short term.

We're looking to several things. You know, we're finishing the stock option investigation and we're saving up our earnings and we're also waiting to see some more stabilization on some of these geographical things that we're working on.

You know, one of the most stable things that we do have in the company is our product line. That option, you know the growth of AquaLogic frontline are all giving us clear indication that we are the trajectory of growth. We are seeing some linearity issues that I think just the buying patterns from our customers are much more back-end loaded than we have seen in the past. I think a lot of it has to do with our size, our stature. You know, now we really sit at the same table as our biggest competitor equally, so people do buy it the same way toward the end. At the end of the year they buy a whole lot more than throughout the year itself.

So we are seeing a lot of that stuff. But there still are a lot of moving parts, you know, China, we're starting a lot larger deals coming out of the country going into this year that will give us I think a change of view of how our guidance will be going into the future.

Our goal is cleaning up some of these things, stabilizing some of the (hesitation) What’s the performance of some of the specific geographies? And seeing a little bit more on our product performance and AquaLogic giving us a little bit more confidence in terms of how this trajectory really is clearly driving to this incredible growth will be providing longer term guidance. It’s forthcoming.

Katherine Egbert – Jeffries & Co.

Okay thanks.

Mark Dentinger

Thank you.

Kevin Faulkner

Janice we have time for one more question.


Okay sir, your last question comes from the line of Sarah Friar with Goldman Sachs.

Sarah Friar – Goldman Sachs

Good afternoon guys. Two quick ones for you. You talk a lot about AqualLogic and some of the faster growing product lines like the WLCP. Can you just touch Alfred on what logic and Tuxedo because when we run the numbers, FrontLogic should be 25% of total Its just FrontLogic and Tuxedo are definitely in decline or least slap at best.

And then just secondarily for Mark, as you finish up the stock option review, is the thought that perhaps you will come to the market at that point and do some more stock reproaches given how much cash you have on hand.

Alfred Chuang

Okay Sara, I’m actually going to take Mark’s proxy and try to answer both of these questions for you.

Sarah Friar – Goldman Sachs

Okay, great thanks.

Alfred Chuang

From the perspective of AquaLogic and Tuxedo (stumbling)...Logic was about market performance. It was about flat, I was disappointed with AquaLogic total for the year and what logic platform. It’s not totally a surprise because I have seen this movie before when we transaction out of Tuxedo and the level of logic.

The sales cost can only focus on one thing at a time. So, as you see AquaLogic as a platform growth, even though many of the components require an AquaLogic server, it doesn’t require the entire what logic platform anymore. A customer selection becomes shifted to us buying the web that AquaLogic platform itself which has many products in there including security, the registry, the services, etc…

So, we saw that shift. Tuxedo actually grew slightly and about the same amount from a year ago. The changes here is a little different. This time we saw a lot more mainframe with hosting project that we had never seen before. So, we’re hoping this year that it would drive and then that program harder and see more substance grow in Tuxedo through the mainframe hosting program.

Our growth area is going to be AquaLogic and that’s where our money is going to be. I think the bus and also the VPM technology will be the key driver to get AquaLogic to continue on this tear in the marketplace.

With regard to the stock buyback, absolutely! Right now, were locked up as a company because our financials aren’t current. So when we get our filings current, we are obviously determined to get both feet in the market place. Aggressively continue in our buyback program that was previously had been approved by the board that were ready to go.

Right now, we are sitting on the sideline for that and as you see the cash position is growing substantially, even paying off all of our $550 million compatible debt option of this year which is really a splendid thing. So, we would expect to go back to do that.

Sarah Friar – Goldman Sachs

Great, okay, thanks a lot.

Alfred Chuang

With that, I would like to thank everyone for listening to our call. I appreciate all of your support and would look forward to spending time with you in the next earning score reporting to you of our continued progress.

Thank you very much.


Ladies and gentlemen, this concludes today’s conference call, you may now disconnect.


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