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Executives

Kevin Faulkner - VP of IR

Alfred Chuang - Founder, Chairman and CEO

Mark Dentinger - CFO

BEA Systems Inc. (BEAS) F4Q08 (Qtr End 1/31/08) Earnings Call February 28, 2008 5:00 PM ET

Operator

Ladies and Gentlemen, good afternoon. At this time, I would like to welcome everyone to the BEA Systems fourth quarter and year-end 2008 conference call. During this call all participants will be in a listen-only mode and today's conference call is being recorded.

Now, I would like to turn the call over to Kevin Faulkner, BEA's Senior Vice President of Investor Relations. Please go ahead, sir

Kevin Faulkner

Thank you, Michael. Good afternoon, ladies and gentlemen, and thank you for joining us as we discussed BEA Systems, Inc. results for the fourth quarter and fiscal year ended January 31, 2008. Please note we've posted our earnings press release and the related financial tables 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 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 future financial performance, future products, features or innovation, customer adoption of BEA products, the proposed merger with Oracle Corporation, the effect of the proposed merger on our distribution and business, and any statements of assumptions underlying any other 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 detailed in item 1-A Risk Factors in BEA's reports on Form 10-Q for the fiscal quarter ended October 31, 2007, 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.

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 prepared remarks, but we will not have a question-and-answer session on today's call.

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

Alfred Chuang

Thanks, Kevin. Thank you for joining us today. As you're all aware, during Q4, BEA announced that we enter into an agreement to merger Oracle. Over the last six weeks, I had an opportunity to talk to many customers, partners, and employees, and received positive feedback on the combination. Customers are excited as I am about the opportunity for combined BEA and Oracle to accelerate innovation in application and service infrastructure.

BEA has built an amazing set of products, and our customers have used those products to power some of the most innovative business solutions. By combining with Oracle, we can have access to a larger global footprint of sales and services professionals, to help even more customers meet their business needs. The proposed combination creates a very exciting opportunity for our customers, partners, and also employees.

The agreement was announced during the great quarter. In Q4, we delivered our best license performance ever. We had a very strong December close, and that was followed by a very solid January as well. Our Q4 results demonstrate that customers continue to adopt BEA technology as a foundation of their SOA architectures, and they continue to share our vision about the next-generation of enterprise computing.

Congratulations to the team for maintaining the focus on customer success and execution. We had very solid Q4 and FY'08 results. In the fourth quarter, we returned to year-over-year license revenue growth. Total license revenue was up 13% over last year’s Q4. AquaLogic sustained its contribution level at a record 27% of license revenue.

Services revenue continued a strong growth, up 17% over a year ago. We have record operating cash flow. Q4 included a solid year. Total revenue grew 10%. Maintenance revenue grew 18%. We generated $367 million in operating cash flow, by far our best year. We added $28 million to our deferred revenues and $25 million to our off balance sheet license backlog. We improved a non-GAAP operating margin by 200 basis points, outperforming our goal of the year.

Let me turn over to Mark now, first to give you details on Q4 and fiscal 2008 results. Then I'll return to talk more about our business. We will not be providing Q&A guidance due to the pending merger. Mark?

Mark Dentinger

Thank you, Alfred. Our merger with Oracle is subject to both regulatory and shareholder approval, and my comments do not address what effect the merger announcement had on our Q4 results nor what effect it may have on our future results. Because of uncertainty during dependency period, we will not be taking any questions on this call, nor will we be issuing any guidance about out future financial performance. If you have questions about my prepared remarks, please contact our investor relation group.

With respect to certain financial data discussed today and corresponding data, presented material posted on our website is helpful to understand the following framework about our results. Non-GAAP presentations of our financial results of operations are derived directly from our GAAP statements. Our standard non-GAAP adjustments are based on the conventions of most businesses in our industry, and exclude the following from GAAP earnings; FAS 123(NYSE:R) expenses on stock option issuances and discounts on employee stock purchase plan; in-process R&D and amortization of deferred compensation and other intangibles associated with acquisitions; and any income or expense items which are not expected to be recurring, such as gains or losses on a impairment or disposal of assets, restructurings and unusual tax items. These standard non-GAAP adjustments are shown in our publication called Quarter in Review, which is posted on our website.

Additionally, three other phenomena, the restatement of our financials; 409A taxes, and advisor fees associated with the merger are affecting our current and recent GAAP earnings, which we do not expect to be a part of our long-term cost structure. Therefore, our non-GAAP earnings also exclude following expenses: any restatement charges or credits impacting our reported results for the last two year; third party expenses associated with completing the stock option investigation and restatement; non-cash charges for modifying stock awards and cash bonuses paid to employees in Q4 fiscal 2007, both of which were designed to mitigate the impact on our employees from not being able to sell their stock during the restatement period; advisory and legal fees arising from activities leading up to our announced merger with Oracle; and payment to employees, former employees and tax agencies to remedy our current former employees' exposure to 409A taxes.

These additional non-GAAP adjustments are shown in the publication Supplement Quarter in Review, which is also posted on our website.

With this framework in mind, let me start by discussing our non-GAAP income statement results. Revenue for the quarter was $440.9 million, up 13% year-over-year. License revenue was $179.5 million or 41% of total revenue, and services revenue was $261.4 million or 59% of total revenue. License revenue increased by 6% from last year's Q4 and services revenue increased 17%. The largest component of services revenue customer support was $206 million, an 18% increase compared to last year's Q4. Consulting and education revenues were $56 million in Q4, up 15% from last year.

Geographically, the Americas region generated 48% of our Q4 revenue, which is down four percentage points from last year's Q4. Internationally, our EMEA business contributed 36% of total revenues, a two percentage point improvement from a year ago, and Asia-Pacific was 16% of revenues, a 2 point improvement from last year.

By product, the AquaLogic family contributed 27% of our Q4 licensed revenue, versus 25% in Q4 of last year. The WebLogic and Tuxedo families contributed 73% of our licensed revenue in Q4, versus 75% Q4 of last year. Q4 total license transaction count of 2,531 decreased approximately 3% from last year, and our average transaction size increased by approximately 9%.

For Q4, industry vertical performance was as follows. Government was 20% of licensed revenue, telecommunications was 16%, software was 14%, banking and finance was 11%. Other verticals were individually less than 10% of licensed revenues for the quarter.

Our aggregate backlog at January 31, 2008 is $558 million, and includes deferred revenue from unexpired maintenance contracts, $449 million; deferred revenue from undelivered consulting and education orders, $23 million; deferred revenue for license orders which have shipped but have not met revenue recognition requirements, $5 million; off balance sheet license orders received but not shipped, $35 million; and off balance sheet services orders received and not delivered, $46 million.

Our aggregate backlog at January 31, 2007 was $500 million, of which $449 was included on our balance sheet as deferred revenue. We did not believe that off balance sheet backlog as of any particular date directly co-relates to future results. As noted -- also note that our off balance sheet backlog is not subject to our normal accounting controls for information that is either reported in, or derived from, our basic financial statements. Finally, the concept of backlog is not to find any accounting literature, making comparisons with other company is difficult and potentially misleading.

Now, let me address costs and expenses. Non-GAAP costs of licenses were 5.4% of license revenue in Q4, up from 4.8% in Q4 of last year. Cost of services was 28.8% of services revenue, compared to 29.5% Q4 of last year. Total operating expenses for Q4 were $236.7 million or 53.7% of total revenue, compared with $225.4 million in Q4 of last year or 57.5% of total revenue.

Sales and marketing expense was $146.5 million or 33.2% of total revenue in Q4, compared with $138.8 million or 35.4% last year. R&D expense was 13.2% of revenue in Q4, compared to 14.4% of revenue in Q4 of last year. G&A expenses, at 7.3% of revenue in Q4, were down from 7.7% of revenue last year.

Our Q4 non-GAAP operating profit was $119.3 million compared with $92.5 million a year ago. Expressed as a percentage our Q4 non-GAAP operating margin was 27.1%, up from 23.6% a year ago. Our non-GAAP other income and expense, or OIE, increased to $15.6 million in Q4 versus $10.4 million in Q4 of last year. The OIE improvement was largely the result of reduced interest expense on our line-of-credit borrowings.

Our non-GAAP tax rate was 27.5% of pre-tax non-GAAP income in Q4 compared to 34.4% in Q4 of last year. We expect our intermediate-term non-GAAP tax rate to approximate 27% to 29% based upon current earnings distribution, but the quarterly rate can fluctuate based upon specific items that arise or settle in each period. After making the previously mentioned non-GAAP adjustments, fourth quarter net income on a non-GAAP basis was $0.23 per share or $97.8 million, versus $0.16 a share in Q4 of last year.

A fully-diluted weighted average shares outstanding used in our Q4 '08 EPS calculation was 423.5 million, and the share number used in last year Q4 non GAAP EPS calculation was 414 million. Our Q4 result would have been approximately 4% lower in total revenue, 3% lower in cost of revenues, and 3% lower in operating expenses, if we translated the current quarter at currency exchange rate in effect last year.

We were also profitable on a GAAP basis during Q4, recording fully-diluted EPS of $0.18, compared to $0.25 per share of loss in Q4 of last year. The large GAAP loss in last year's Q4 resulted from $200 million asset impairment write-down on vacant property in San Jose headquarters, which was sold in Q1 of fiscal of '08.

Part of our GAAP earnings in Q4 of fiscal '08, we absorbed the following additional pre tax charges--$1.5 million for external expenses associated with the options investigation and restatement; advisory and legal expenses of $10.3 million for merger related activities; approximately $3 million in charges for stock repricing which is part of the Q4 tender offered to employees impacted by 409A, and approximately $2.8 million for payments to former employees and tax agencies to remedy 409A issues.

Now, let me address our balance sheet. We ended the quarter with total cash investments of about of about $1.5 billion, and we generated $123 million in cash flow from operations during Q4. In the same quarter last year, our operating cash flow was negative $3 million, largely because of a one-time $99 million reclassification out of operating cash flow and into cash flows financing activity.

As discussed last quarter, this reclassification results from adopting FAS 123(R) in fiscal 2007, combined with the fact that BEA drew down evaluation results against deferred taxes assets for the first in Q4 of '07. Had we not recorded the one-time adjustment, cash flow from operations in last year's Q4 would have been $95 million.

DSO at the end of Q4 was 81 days, compared with 91 days at the end of Q4 of last year. Our deferred revenue balance was $477 million at the end of Q4, compared with $449 million at the end of Q4 of last year. Total headcount was essentially unchanged during Q4, and we exited the quarter with 4,117 employees.

Thank you for joining us today, and now let me turn it back to Alfred.

Alfred Chuang

Thanks Mark. So, now, let me give some of my thoughts on our Q4 and fiscal 2008 results. In Q4, every geographic region hit the budget and grew year-over-year. Asia-pacific continues to the lead the way, with 45% growth in license orders. China, continue to deliver strong growth. We also had strong performances in ASEAN, India, and Australia and New Zealand. We continue to view Asia-Pacific as a leading growth opportunity.

Our performance in Americas was led by the North Central region, South Central region, Federal and Latin America. Our EMEA performance was led by the U.K and Spain. EMEA delivered a strong performance in May budget, inspired by two large deals that slipped late in the quarter.

Demand for our products was very strong in Q4. Tuxedo had a big Q4, and grew slightly for the full year. WebLogic Server performance improved in Q4 as well. Customers for our foundational technologies included ALTEC, eHarmony, Intec Billing and Research in Motion.

Portal and BPM continue to provide the interface to SOA projects. Our SOA, our portal business, grew 11%, two percentage points faster than industry analysts estimate the portal is growing. AquaLogic BPM sustained the last year's momentum, delivering 47% growth this year. Portal and BPM customers in the quarter included Cingular Wireless, Petroleo Brasileiro, Research in Motion, ScrewFix and Vertex Pharmaceuticals.

For the last few years, we've talked about SOA Governance and Integration as a key trend. Those trends continue to drive customer's option of BEA technology in Q4. Our AquaLogic integration products delivered 18% growth for the year. In Q4, SOA Governance revenue once again doubled year-over-year. For the full fiscal year, SOA Governance delivered 140% growth. SOA Governance and Integration customers in Q4 included Cigna, Comagas, Sempra Energy, TIAA-CREF, United Airlines and Vivo.

WebLogic communication platform had the best bookings quarter ever. The market emphasis on opening up networks to third-party content provides as well as the integration of communication with Web 2.0 provides an important market opportunity for WLCP. In addition, this quarter we saw a market opportunity, we did not expect for WLCP. One of our large customers is rewriting software from their core network onto the WebLogic SIP Server. We expect the WLCP to serve next-generation voice, video and data networks.

But we did not expect Telcos to migrate core network elements. This customer, in conjunction with BEA and one of our customers, is building software-driven smart switches in the hardware network. Migrating their Class 4 switches to Linux Blade servers, WLCP customers in the quarter included France Telecom, Alcatel, Italtel, and a large US carrier.

In addition, we continue to make progress with our new Virtualization products. In Q4, we announced WebLogic Liquid Operations Control, a management suite that goes with WebLogic Logic Server Virtualization Edition. We also shipped a new version of the WLS Virtue Edition, which tests have shown can actually run a virtualized application faster than a physical application. We have received several orders for CPOs, and the pipeline grew dramatically after the release of the new version of the product. Yesterday at VMware EMEA, BEA and VMware announced the distribution partnership, where BEA Virtualization technology will be embedded in VMware products.

Let me give you more details on how customers are using our products. Dell Computer is undergoing a major transformation as an organization. To drive the transformation, Dell is building an enterprise-wide SOA platform accessed by all the company's major business units, based on BEA’s technology. Dell underwent a rigorous competitive evaluation, and selected BEA as a primary technology for this new platform. Dell purchased the entire AquaLogic product family, as well as our Virtualization technology.

Vertex Pharmaceuticals is a global biotechnology company committed to the discovery and development of breakthrough small molecule drugs for serious disease, focusing on bio diseases, cancer, autoimmune disease and bacterial infections. Vertex selected AquaLogic use interaction and BPM Suite as a platform for collaboration with researchers in both research and regulatory approval process.

eHarmony, the online dating site is siphoning 70 million registered users, and growing in excess of 45% annually. They selected BEA as a foundation because of the scalability, reliability, and performance that are crucial to user experience, as well as the ability to seamlessly implement application upgrades.

United Airlines chose BEA as partners as they move forward with a major new SOA initiative. United is in an increasingly competitive environment requiring great agility, and an improved ability to innovate and meet the evolving needs of traveling public.

With enterprise-wide SOA initiative powered by Weblogic Server, Weblogic portal and the complete AquaLogic product family, United will provide such unique offerings as self-served baggage tracking, and automated upsell award redemption system. This system exceeded 1,500 transactions per second during the proof-of-concept process. SOA Governance will be used throughout the lifecycle of this initiative. This initiative is designed to allow United's IT departments to drive measurable results for the business, in the form of reduced costs, minimized risk and much faster time to market.

La Caixa is a major savings bank in Spain, and one of the largest in Europe, with around 10 million customers, and more than 5,000 branches, as one of the most successful online banking systems in Spain, which has been powered by Weblogic Server since it was launched in 2000.

As part of a global strategy to reengineer software architecture and application for its branches, La Caixa decided to replace an existing high TCO infrastructure with an extension of the WebLogic Server environment aided by BEA Consulting Services. BEA won this architectural deal in competition with IBM.

As an early lead in SOA, we can see that SOA is in the first step of the journey to the creation of a new class of dynamic business applications that will enable enterprises to innovate much more quickly. Enterprises have spent billions of dollars installing packaged software applications, only to find that the standardized business logic inside merely accelerates their path to becoming average.

True business innovation is happening outside the packaged application, and BEA is at the forefront of enabling enterprises, ISVs, to design a new breed of dynamic business applications. The first phase of Project Genesis, BEA's initiative to deliver a dynamic business application platform, is scheduled to ship in the middle of this year.

Now, let me comment on the proposed merger with Oracle. Yesterday, the Department of Justice and the Federal Trade Commission granted early termination of the Hart-Scott-Rodino review period for the proposed merger. Also, as recently announced, BEA has scheduled a special meeting of stockholders to consider and vote on the proposed merger. The meeting is scheduled to be held at 10 am Pacific time on Friday, April 4, 2008. The transaction will require BEA stockholder approval and regulatory clearances from the European Commission, and is subject to other closing conditions. BEA and Oracle are working towards obtaining all required clearances as soon as possible.

Before I conclude, let me summarize. Here is what I see as key themes of the quarter and our financial results. First, we delivered a record quarter and returned to license revenue growth. Second, customers continue to adopt BEA technology as a platform for SOA and other major enterprise projects, and share our vision for dynamic business applications, the next generation of enterprise computing beyond SOA. Third, we've continued to make significant improvements in our operating efficiency reflected in both our operating margins and our operating cash flows.

We believe in our strategy, future prospects and ability to execute. During this time, as the merge with Oracle is pending regulatory review and shareholder approval, the Company is focused on executing our growth strategy, improving our operating model and making our customers successful.

This concludes our call. Thank you very much for joining us today.

Operator

Once again, thank you all very much for joining us. That does conclude today's presentation. Have a great afternoon.

Question-and-Answer Session

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