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BEA Systems (BEAS)

Q4 2006 Earnings Conference Call

February 23rd 2006, 5:00 PM.

Executives:

Kevin Faulkner, Vice President, Investor Relations

Alfred Chuang, Chairman and Chief Executive Officer

Mark Dentinger, Chief Financial Officer

Analysts:

Adam Holt, J.P. Morgan

John Rizzuto, Lazard Capital Market

Katherine Egbert, Jefferies & Company

Sarah Friar, Goldman Sachs

Heather Bellini, UBS

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Operator

Good afternoon. My name is Lynn, and I will be your conference operator. 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-answer session. If you would like to ask a question during this time, simply press "*" then the number "1" on your telephone keypad. If you would like to withdraw your question press the "*" then the number "2" on your telephone keypad. Thank you. Mr. Faulkner, you may begin your conference.

Kevin Faulkner, Vice President, Investor Relations

Thank you, Lynn. Good afternoon, ladies and gentlemen, and thank you for joining us as we discuss BEA Systems Inc. results for the fourth quarter and fiscal year ended January 31, 2006. Please note we posted our earnings press release on our website at www.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, expect, 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 first quarter and any statements that could be construed as guidance regarding our future financial performance. Our continuing business momentum, future customer results or implementation of our products, future products releases and any statements or 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 the section entitled "Risk Factors" that may impact future operating results on pages 46 through 61 of BEA's report on Form 10-Q for the fiscal quarter ended October 31, 2005, 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 pro forma basis in addition to reporting results under Generally Accepted Accounting Principles. BEA's non-GAAP measures excludes the impact of certain acquisition-related charges, net gains or losses on investments, facilities consolidation and other nonrecurring charges and assumes a tax rate of 30%. 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 www.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, Chairman & CEO

Thank Kevin, and good afternoon everyone. We are very pleased to report fourth quarter results that are above the expectation that we set on our last earnings call, and also above the range of our February 2nd preliminary earnings release. BEA had a very strong fourth quarter and also fiscal year, driven by strong organic growth as well as some contribution from our acquisitions. With a record 31 license deals totaled $1 million, our year-over-year license revenue growth rate accelerated once again. These results are the continuation of the trend that we saw all year, and we project double-digit year-over-year license revenue growth again in the first quarter. We are delivering innovative products that provide real business value, and we are starting to see our new products make significant contribution for our revenue. We had solid execution worldwide both in large deals and also in deal volume.

Let me give you some details of our Q4 performance. Revenue was a record $341 million, which is above our guidance range. License revenue was $156 million, up 18% from the year ago, and also above our guidance range. Services revenue was $186 million, including $145 million of that in maintenance revenue, up from $125 million a year ago. Customers that buying BEA technology in Q4 included ExxonMobil, Genworth Financial, O2, Optus, Pfizer, United Airlines, Verizon and Web Corporation’s inner-core unit, the various service that is providing the service for this conference call.

GAAP operating profit for the quarter was $58 million, and non-GAAP operating profits were $68 million. Cash flow from operation was a record $102 million. Deferred revenue was up $67 million compared to last year, and now stands at a record $379 million. For the fiscal year, revenue was $1.2 billion, up 11% from last year. License revenue was $512 million, up 6% from last year. Services revenue was $688 million, up 15% from last year, including $543 million of that in maintenance revenue, up 17% from last year. Cash flow from operation was a record of $285 million, up from $267 million from a year ago.

Now, let me turn to guidance for Q1. Based on the current business condition, we forecast Q1 total revenue to be in a range of $315 million to $325 million. And as described in our February 2nd preliminary earnings release, we expect our Q1 license revenue to be in a range of $128 million to $133 million. Later on in the call, Mark Dentinger, our Chief Financial Officer will give you some more details on our financial performance and also about Q1 guidance.

So now, let me turn to business. In this part of the call, I will discuss our Q4 results, also by year, our product strategy, and also how our customers are implementing SOA on our products. Q4 results were balanced across deal sizes, geographies, product families and everything else. Our closure rate in big deals was outstanding, that would have healthy contribution and also our new AquaLogic product line. These factors made us to believe that our business momentum is continuing.

As I mentioned earlier, in Q4, we signed a record 31 license deals of at least $1 million compared to only 15 a year ago. Our million dollar deal count for the year was 78, which is also record and an improvement over 53 a year ago. Pre-Q4 license deals were over $5 million, and no license deals were over $10 million. The average deal size of our million deals went up slightly from the third quarter, but in line with the average over the last two quarters. Contribution from our million dollar license deals grew by 60% compared to the fourth quarter of last year. Balancing the multi-million dollar addition was also a very solid performance in our small and medium sized deals. License deal count grew year-over-year for the fifth consecutive quarter.

In Q4, we filed a total of more than 2750 license deals, up by more than 300 deals from a year ago. Contribution from license deals between $100,000 and $1 million grew by 25% compared to last year's fourth quarter. Q4 results were also balanced geographically. Each of the three geographical regions overachieved the budget for the year. Fourth quarter closure rates were excellent. The Americas had a record year at fourth quarter driven by particularly strong performance in the south, in our federal business, and also ISP territories. EMEA had a record quarter driven by the UK, France and Germany. Asia-Pacific region, again had a record quarter in the year driven by strong performance in China, South Asia and Australia.

In Q4, we continued to make progress on our go-to-market initiatives. I want to give you some highlights on that. Enterprise Account programs grew by over 80% for the year that far exceeded our goals. Enterprise Account programs contributed 13 of our million dollar deals in the quarter and 34 in the year. In particular, we have remarkable success in selling AquaLogic into our Enterprise Account. We are building deeper relationships in our Enterprise Accounts, and the customer program this year demonstrates the value of focusing resources on our top customers.

The VAR program that we talked about earlier significantly declined in the fourth quarter, enabling them to beat their plan for the year. Transaction count grew by 25% compared to the third quarter, and was down across the Americas. So, we have gained significant tractions with the top IBM and Oracle VAR, that the VARs that seem value in both our products and also our business model. The Solution programs beat this plan by the year by more than 43%, mainly driven by the customer self-service and employee self-service solutions. In Q4, the customer self-service solutions contributed to three of our million dollar deals, and service delivery platform contributed in two large deals.

The Solution framework are helping the sales force to generate pipelines, expand the relationship with existing customers, and also achieved quick business success especially in early SOA projects. The Solution team is now working on the mix set of solution, including and incorporating a WebLogic communication platform technology in what we call a quick resulted feature in the customer self-service solution.

So in summary, our key go-to-market initiative exceeded the goal and contributed to growth during the year, withstanding, and continuing this program into the new fiscal year. The go-to-market initiative is the one element of our growth strategy for the year, the other key element of our growth strategy was our new product pipeline, which is also very successful. I want to give you some details about our new products.

In the fourth quarter, our WebLogic product line grew 12% over last year. As we clearly have gained significant momentum in market share in the second half of the year. This year, BEA shipped two new versions of WebLogic server with several key new features. WebLogic server now supports multiple programming models, including obviously J2EE, Now, Spring, Beehive, Web Services and a few others. We shipped the world's only WebLogic application server this year. This feature enables side-by-side application installations or HotSpot installations allowing customers to upgrade their applications and server, server itself with no downtime, and in real time. Other key features include new and enhanced security features, improved and enhanced management console, improved diagnostic capabilities, enhanced runtime management, new web services functionality and testing. All of these capabilities had decreased labor cost required to build and sustain application, and reduce time and risk affiliated with IT project.

Well ofcourse, we also looking at expanding our market leading performance. BEA currently holds the top three spots on effect AppServer, 2004 benchmark, that’s what it is telling us that they are achieving new benefits with new features that’s reducing the administrative cost and hardware cost, and people cost, and our application to believe has expanded.

Customers are telling that our product performance is so far ahead of the competition, going with BEA is the obvious choice. WebLogic communication platform continues to see with customers and more product functions. Some of those project turn into orders in Q4. We are encouraged by customer response of the WebLogic product. The key to the 3G markets is carriers, opening up the networks to services from other parties, and other content providers. Network Gatekeeper offers customers a very flexible, very powerful, way to manage these environment. O2, which is the big cell phone service provider in the UK, is an example of a customer with Network Gatekeeper to underpin the next generation mobile in that content delivery, including IMO and also a service called O2 Access.

Today, over a 100 well-known brands have developed official IMO sites, which allows the customers to do things like banking, shopping, and booking tickets and other things directly online on the mobile phone. O2 Access focuses on the entertainment, life streaming news, sports, music, and playing interactive games on their phone. WebLogic Chip server is the platform for deploying those kinds of services. This quarter, we will update we’ll include the product for IMS, and Chip server won the "Product of the Year Award" from IP Telephony magazine. WebLogic Chip server will be the only carrier for J2EE server available on the market. The potential of the WebLogic communication platform remains very strong.

Now, we are optimistic about what it can do for BEA in the Telecom market and to our customers. We continue to investment in the team, both on the sales side and also on the development side. We are hiring key points from the industry, who will bring both domains expertise and also valuable business relationships to domain. We continue to work with a variety of potential partners including SIs, network equipment providers and also ISP. In particular, we are beginning to work in collaboration with several big network equipment providers, but we’ve seen a lot of interest in the last week's pre-GSM conference.

Let me talk about some of the other products. Tuxedo grew slightly for the year, while customers will need bulletproof reliability and super scaleable performance in a Multilanguage environment, Tuxedo is still the only choice. BEA continues to invest in Tuxedo to help customers to pluck trend use cases like SOA and of course, Tuxedo continue to lead the market in performance as shown by the record Tuxedo's hold in the CPCC benchmark.

Let me talk about the new product, AquaLogic. Our new AquaLogic product line contributed a little more than 10% in license revenue in Q4. With the new service plus and user interaction product, a focus on the new brand and a focus on SOA AquaLogic delivered very large increase over last year. AquaLogic was included in our intent of our million dollar deals in the quarter. BEA now has more than 800 AquaLogic customers. AquaLogic customers in the quarter included AstraZeneca, Blockbuster, Gorgeous Tos (phonetic) Northwest Airlines, Pfizer and United Airlines. SOA has emerged as a leading pricing strategy for streamlining service delivery, as customers expand the use SOA, they face new challenges in building, managing, monitoring, and securing these environments. AquaLogic provides them for a new building blocks, and direct these some challenges. We believe that SOAs will be in architecture for the next generation of IT systems. And AquaLogic is the product that can help move SOA from the pilot phase to very largely deal production. AquaLogic is the only production SOA platform on the market today.

Let me give you some examples of how customers are using BEA products and meet their needs, especially their business needs, moving with SOA. Those frankly is a wholesale mortgage broker specializing in non-conforming mortgages at home equity lines. Those frankly develop an automated underwriting application running on WebLogic server. And you do WebLogic integration can go backend chat applications. Now they use AquaLogic to implement the service oriented architecture. They use the AquaLogic service plus to move away from point-to-point end connections in the integration activities. This allows them to rapidly build composite applications, they also use the AquaLogic Data Services platform to get a single view of the loan process. This frankly has broadly seen the benefits from when we move into SOA, we are using core services like pricing, and moving away from tidy couple connections has allowed them to move very quickly to bill new services in response to the always changing business units needs in the mortgage business. This is a very good example of how a WebLogic customer expanding to AquaLogic as they implement SOA in the existing environment.

Another excellent example is the Verizon Wireless, which is implementing, and SOA is part of the new infrastructure that facilitates customer self service. A customer is using a SOA approach to extend these applications into their shares of business environment. Verizon Wireless already seeing payback on its investment in sales service at 26% of all payments, at 42% of the graph to the wholesale are now made online. The case has seen the development on the BEA platform and the SOA approach are enabling Verizon Wireless to update, we are now often talking about almost real-time, and in response to business user requirement after implementing a new calling plan, and also offering new services, various things start that we can see in the life.

Another exciting example is the University of California San Francisco Medical Center, one of the tough institution that ranked in the top ten US hospitals, licensed BEA technology this quarter to help us achieve its goals of including upon its ranking by utilizing on our technology. BEA is enabling a business integration solution for UCSF hospital that will play a vital role in the integration of multiple medical systems and devices across multiple departments for providing a 360 degree view of patients for the people at management clinics. High reliability and scalability are probably seen in these cases. We achieved this kind of integrative solutions UCSF licensee BEA WebLogic platform, AquaLogic enterprise service plus, and data services platform.

Some of the hospital's objectives includes eliminating single point of barrier, improving the ability to provide 24/7 operation, streamlining and simplifying the creation and management of innovations and ensuring regulatory compliances are in place. The integration solution represents both of its kinds in US, a large scale enterprise integration solution for the top ten US Research Hospitals. It also represents a branding account for BEA and for AquaLogic.

In addition, SOA and AquaLogic are gaining momentum with our global SI partners. One of our global SI partners is now having AquaLogic Service Plus as an integrated layer, Oracle and SAP Applications. In particular, this integrator is getting up into the SAP install base in many, many instances. And in many cases, our local sales reps are engaging closely with the integrators local reps to make that happen. This several collaboration is helping BEA get us into new deals for the year, both in pipeline and grow deal prices and also improve growth rates.

One last subject I would like to cover is our maintenance business. For the year, couple of the portal’s revenue grew by 17%, despite unfavorable changes in exchange rates. BEA is setting a new standard for customer support in the software industry. Our mission critical support program was still significantly, I mean, our mission critical support program was still specifically for the need of customers like Telcos and Financial institutions. This program contractually warns uptime, back life service level agreement and financial penalties. This is similar to what the network equipment providers warn in the Telco market side. And we are getting into these kinds of mission critical business.

In the software industry, nobody except BEA offers this level of support. We can offer this level of support, because of the quality of our software and the quality of our service. We can provide guarantee uptime because the software simply works. And that is differentiated in the marketplace. The support team is working on the next generation support offerings based on feedback from customers around the types of program that will be valuable to them.

But before I turn the call over to Mark, let me give you a summary. This is what I see the three key things of the quarter.

First, BEA license revenue growth rate accelerated again this quarter. And we continue to see double-digit year-over-year growth going into Q1.

Second, our sales force execution was excellent with each region leading the budget and growing at least 10% at both the quarter, and also the year.

Third, results are driven by strong organic growth. In particularly, from our new AquaLogic product family for SOAs supplementing by solid contributions from our acquisitions and our other new products.

Now, let me turn the call over the Mark Dentinger, our Chief Financial Officer, for more details on the Q4 performance and also our guidance. Mark?

Mark Dentinger, Chief Financial Officer

Thank you, Alfred. Our fourth quarter results ramped up a very eventful and successful year at BEA, and we are very excited about our fiscal 2007. I remind everyone that our income statement is presented in two formats: One under Generally Accepted Accounting Principals or GAAP, and the other in a non-GAAP format, which excludes certain non-cash and/or non-recurring expenses including those mandated under FAS 123R, which BEA will adopt in the first quarter. More specifically our non-GAAP results exclude FAS 123R expenses on stock option, FAS 123R expenses on our employee stock purchase plan sales, charges for amortization of deferred compensation and other intangibles associated with acquisitions, and any and any income or expense items, which we do not expect to be recurring such as gains or losses on deposal or investment to financing, restructuring charges and other non-recurring tax items.

Our non-GAAP financials include charges for the intrinsic valued stock options branded below fair market value; charges associated with stock issued or sold below fair market value expect sales to our employees under our stock purchase plan, and all other recurring expenses under US GAAP. Most of this discussion represents our historical performance in forward looking guidance in a non-GAAP format, where GAAP numbers are referenced I will make the distinction.

Revenue for the fourth quarter was $341.4 million, up 17% year-over-year. License revenue was $155.8 million or 46% of total revenue. Our services revenue which includes consulting, education, and customer support was $185.6 million or 54% of total revenue. License revenue was up 18% from Q4 of last year, while services revenue grew 17% year-over-year. In Q4, international revenues were 48% of total revenue. The European market contributed 33% total revenues, and Asia-Pacific was 15% of revenue. EMEA and Asia contributed 36% and 14% total revenue in last year's Q4.

The Americas region at 52% of total revenue was up two percentage points from Q4 of last year. The vertical mix of our business was fairly consistent with recent quarters. In Q4, health communication sector represented 22% of license revenue, government was 21% of license revenue, banking and finance 14%, and services was 10%; other verticals were individually less than 10% of license revenues for the quarter. Q4 license revenue improvement was a function of both an increased number of transactions as well as the higher average transaction size. Our license transaction count of 2782, was up 14% both sequentially and year-over-year, and our average deal size increased by 13% sequentially and 4% year-over-year.

Let me now move on to costs and expense. Non-GAAP cost of licenses was 5% of license revenue in Q4, up slightly from 4.6% of license revenue in Q4 of last year. Cost of licenses is mostly driven by license compliance cost, royalty payment to third party, and distribution and localization expenses. Cost of services was 32.8% of services revenue compared to 31.3% Q4 of last year. Services margins declined from last year's Q4, principally due to the effect of consolidating Plumtree in Q4 of this year, which has the higher mix of professional services contribution. Part of the mixed difference between business integration division and the rest of BEA arises because of the deferred revenue, deferred support revenue that was written-off as part of the acquisition in Q3.

Total operating expenses for Q4, after the effect of non-GAAP adjustments were $204.7 million or 59.9% of total revenue. Overall, operating expenses as a percentage of revenue were up about one percentage point in Q4 of last year. Sales and marketing expense was 36.3% of revenue, which is down from 37.6% of revenue in Q4 of last year. R&D expense of 15.2% of revenue was up from 13% of revenue reported in Q4 of last year. G&A at 8.4% of revenue was up from 8.2% in the prior year. R&D and G&A expenses were higher in Q4 of this year in large part due to consolidating Plumtree.

Our fourth quarter non-GAAP operating margin was 20% down two percentage points from Q4 of last year. Our non-GAAP operating profit was $68.2 million was up from $63.9 million of last year. The fourth quarter net income on a non-GAAP basis was $0.12 per share or $48.7 million. Our Q4 revenues, cost of revenues and operating expenses would have been virtually the same and we reported them based upon exchange rates in effect during Q3 of this year. When comparing BEA's Q4 results with last year, the US dollar strengthened against most of our international currencies, and our Q4 results would have been 4% higher in total revenues, 2% higher in cost of revenues and 2% higher in operating expenses that we translated to Q4, this Q4 rates in effect during last year's Q4.

We also achieved profitability on a GAAP basis, and net income per share of $0.09 compared to GAAP earnings of $0.10 per share reported in the fourth quarter of last year. Our press release provides a full reconciliation to describe the differences between our GAAP and non-GAAP results.

In Q4, our non-GAAP tax rate was unchanged to 30%, but our GAAP tax provision increased to 41%. Q4 GAAP increase was principally due to a non-recurring charge associated with repatriated cash from our international subsidiaries under the Jobs Creation Act of 2004. Primary differences between our GAAP and non-GAAP results in Q4 were due to amortization and impairments of acquired intangible assets, acquisition-related deferred compensation expenses and the non recurring tax charges I just mentioned. In my comments and forward-looking guidance, I will address anticipated future differences between our GAAP and non-GAAP results. Our balance sheet position continues to be very strong with cash and short-term investments of about $1.5 billion as of January 31, 2006. Cash generated from operations for the fourth quarter was $102 million. DSO for the quarter was 87 days, 7 days higher than Q4 of last year. Deferred revenue increased about $76 million during Q4, and $67 million from last year. Historically, our recorded deferred services balance tends to decrease slightly during the first three quarters and increased significantly in our fourth quarter, principally as a result of the timing of our support contract renewals.

Deferred license revenues are less predictable, and the balance fluctuates as a function of the timing in terms of transactions. Further, deferred license changes in period will not necessarily directly correlates to license revenue in future periods. For aggregate backlog, at January 31, 2006 is $446 million, and includes deferred revenue from unexpired maintenance contract is $341 million, deferred revenue for undelivered consulting and education orders is $22 million, deferred revenues for license orders which was shipped of net revenue requirements $16 million, off-balance sheet license orders received shipped $31 million, and off-balance sheet professional services orders received did not delivered $36 million. Aggregate backlog for January 31, 2005 was $357 million, of which $312 million was included in our balance sheet as deferred revenues. We did 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 controls for information they decide to report it in or derived from our basic financial statements.

Primarily, the concept of backlog is not defined in returning ligature making to bear things with other Company's difficult and potential limits. During Q4, we repurchased about 1.5 million shares of common stock and an average purchase price of $8.93 per share for an aggregated amount of about $13.7 million. For the repurchases will be a function of market opportunities based on certain pricing volume parameters. As of January 31, 2006 we had Board of Directors' authorization for an additional $123 million in stock repurchases. As discussed in our Q3 earnings call, our convertible debt which is during December of 2006 maturity in Q4 has now shown us a current liability in our balance sheet. During the quarter, we repurchased $84.8 million in face value of these items. The Q4 repurchases were executed at prices below PAR and generated a small non-operating gain which is reflected in our GAAP and other income and expenses. This gain was excluded from our non-GAAP earnings. After the quarter end, we also repurchased an additional $189.5 million from face value of these notes. As of today, $276 million is convertible notes during December 2006 remain outstanding and we may retire this debt early if we can do so at attractive prices.

Total headcounts decreased by 15 people during Q4, but we exited the quarter with 3878 employees. We plan on selectively adding to our headcounts during Q1, principally in R&D, sales and services with a focus on our new product initiatives. I will now make several comments in both GAAP and non-GAAP financial guidance. Following comments and guidance are forward-looking statements, and any other comments about our future financial and product performance. You should review our Form 10-K as of and for the period ended January 31, 2006 which contains important risk factors that could cause actual results to differ from those contained in my forward-looking statements. Additionally, product transition, seasonality factors, uncertain customer buying patterns, and concentration of large license transactions, especially towards the end of our quarter, add to our volatility, and make it difficult to predict revenue and earnings in future quarters. We have seen an impact from these factors in past quarters, and we expect them to continue to be significant risk for our results in future quarters. We believe these risk factors are particularly pronounced in our first fiscal quarter, which has historically been our most challenges.

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. We do update our comments on guidance. It is 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 other than the Q1 seasonality factors previously mentioned. As noted above, our Q4 to Q1 seasonality patterns have become more pronounced recently, and we expect this trend to continue.

Based on these factors and current business conditions, we anticipate that total revenues in the first quarter will be within a range of $315to $325 million. At this revenue range, we expect to report non-GAAP operating margins of 17 to 18%. Non-GAAP interest and other income is anticipated to be approximately $1 million, and shares outstanding are currently expected to increase 3 to 5 million shares recording stock repurchases if any, we are modeling our Q1 non-GAAP tax rate at 30% which is consistent with our historical rate.

Finally, we anticipate the differences between our GAAP and non-GAAP earnings will become more significant going forward. The revenue levels previously mentioned for Q1 GAAP operating margins are expected to be 10 to 11% with most of the increase in the GAAP versus non-GAAP difference attributable to adopting mandated FAS 123R. We also anticipate a one-time non-operating gain of approximately $8 to $9 million in Q1 as a result of disclosing of our investing in wiring technology which is being sold to computer circuits.

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

Alfred Chuang, Chairman and Chief Executive Officer

Thanks, Mark. BEA delivered a very solid fourth quarter and accelerated our license revenue growth rate again. Every geographical region met their plan and delivered the double-digit growth. We are expanding our performance leads, delivering new innovative products into growth markets such as voice, services and video over IP and also most important of all, the SOA marketplace. We are already seeing significant revenue contributions from these new product lines, and we believe the growth market addressed by these products will be drivers for IP spending over the next several years.

With that let me turn the call back over to Kevin, and open up this call for questions.

Kevin Faulkner, Vice President of Investor Relations

So, Lynn we are ready to take questions.

Question-and-Answer Session

Operator

At this time, I would like to remind everyone, if you would like to ask a question, please press "*" then the number "1" on your telephone keypad. We will just a moment to compile the Q&A roster. Your first question comes from the line of Adam Holt with J.P. Morgan.

Q - Adam Holt

Hi, good afternoon. First question is on the enterprise accounts effort. Could you remind us, how large that effort is right now? What we should expect in terms of headcount adds this year? And what might be some revenue targets for growth rate heading into next year?

A - Alfred Chuang

Hi Adam this is Alfred. So the enterprise account right considering about hundreds of our top customers. And they do spread across different industry. They may not be the top 100 customers in revenue historically. But we believe those are the top most important customers in our installed base that we need to grow in. We expect to grow that seeing a significant volume, although this coming year, could be by as much as 100% growing to about 200 customers in that account itself. So appropriate number of, what we call the global account managers, sales representatives, system engineers, and consulting employees will be booked into those accounts. And also equally I will try to put that many of those accounts on to our mission critical Support program as possible. So we will see significant growth into this program going through the year.

Q - Adam Holt

Great. Thank you. And just a follow-up for Mark. If I could, on that the backlog number is quite helpful. If you could give us a sense for over what timeframe we should expect to see the license component both in terms of the unbilled piece, and the other license component recognized.

A - Mark Dentinger

Yes Adam. Yes as I stated in my commentary, especially to bill piece of the license components, it's a mix of transaction that could turn to revenue relatively soon, hope we have longer-term depending on delivery times or if we have deliverables that we have to be in there. So, yet we don’t have a compiled list of data how soon it turns into revenue, most of the off-balance sheet backlog is relatively correct, and will turn in revenue, fairly shortly.

Q - Adam Holt

And just finally, you obviously expect to see very good traction on the revenue side with some of the new products. When do you think that's going to begin to translate into year-on-year margin expansion? Thanks very much.

A - Alfred Chuang

Thanks Adam. Well, I will tell you, well AquaLogic already has, I think actually product that surprises, in just, you know, over a five-month period, it really has just hit all, and sales reps are just telling all of us in the management that they love it. And our customers are loving the products itself. We are also stunned, highly accepting installed-base had adopted the products so well. We've also seen sales of this particular product into account where we have never sold before. We also sold this products in deals where we did not include any licensing products. So, we are also seeing multimillion dollar deal that has come in for AquaLogic, so I think from a AquaLogic perspective, you know, no doubt, it's a marginal improvement contribution. Well, some of the other products like the communication platform, you know, I think over the next few quarters, to get into margin cost business, both have longer sales cycle. The revenue component is big when we are going to be, when we will be able to recognize and some of those deals that we have signed, that we have been doing pilots and subsequently having contract with the customers. And we are working on many new stuff including supplement and the acquisitions that we will try to make margin possibly over the next two quarters. We are doing the revenue looking assuming them into the Company from causing some cases and also adding the topline very rapidly. So I think all the customers are seeing, and leading all of the product life into this new generation, and although this next coming year. Most of them will be in the margin positives.

Q - Adam Holt

Great, thanks very much.

A - Alfred Chuang

Thank you. We will take another question Len.

Operator

Your next question comes from the line of John Rizzuto with Lazard Capital Market.

Q - John Rizzuto

Good afternoon, everyone. Good job on this quarter. Just a couple of quick questions here, Alfred you said that you are gaining traction in the Oracle and IBM VAR channel. Can you give us a little bit more information on what that is and is there a way, that we can quantify that at all.

A - Alfred Chuang

John, I think it's little bit early to give you historical data as the projects comes fairly new, we obviously seeing, I think the typical, you know, stock and programs ranking process that we expect to go into Q4. Most of these are a lot carrying multiple compared to this product in the product line. We also have a component in there, called as VAD which is Value Added Distributor, and we have two of them that we have signed up in Americas right now. And the VAD ultimately, because it is everybody's product, we will always seeing instead of, the VAR and the VAD, seldom are compared to this product, they are selling our product. And I think the number speaks for sales for the quarter, however that actually is going up. So, I think over the next few quarters, once we get into that historical data, we will start providing to, except this, how much penetration that we are seeing in taking deals away from our competitors with the VAR channel itself. But right now, it is really is looking very, very good. Mostly because they see our part to be very easily to install, very VAR friendly, you need very little human touch, it has a big brand in the market place, you know, project accepted passion, we are very cooperative you know, especially in the way that we design component with the VAR, and then these in our products sell subsequently, I think that ultimately, you know what the VAR is. You know, you can't give them products or they have to do a lot of the lead generation. We diligently think that they get to sell in the market place, I think we are effectively well.

Q - John Rizzuto

Okay, perfect. On the, you talked about maintenance actually, coming out with a new level of maintenance if you will, or even more robust maintenance program. Does this, do you anticipate being to able to raise prices on maintenance, or this is really added-value to maintain the current pricing that you have?

A - Alfred Chuang

John, I think, it's an interestingly remarkable year. I think there has been concerns, I think across the board in our industry, the enterprise software industry, that people can about maintenance prices by cost cutting. I think in this particular, I think over the last four quarter in particular, they cleared it through that is no concern about pricing, the people pay for value of services. What we have introduced, you know, quite a few quarters ago it was obviously called the mission critical support. And we were stunned. How many of our top tier customers that windup to MPS, and I think it's a lot of hard work by our services organization, very focused selling into installed base of these services. But clearly, again our customers are asking for more and more including, you know, which became very fashionable now. It's because of our installed base is growing so large, and so some of the telecom, some of the financial institution, which runs a bit tier one, on site 24/7 global support from BEA at their location. Some of those are not designed into our programs and not up to date yet. So we are finding to have even more innovative sort of strange program. So, we will be able to charge more. I actually believe that you know our maintenance margin still has room to grow going into the future.

Q - John Rizzuto

Okay, that's pretty good in the year. And then finally, you didn't talk a lot about Plumtree or your WebLogic user interface, I don't want to call them as vision, but that product line you setup. Can you give us a little bit of information on, how that works now?

A - Alfred Chuang

Sure. It's actually called business interaction division. So we call them business for the Company. It has gone very well, you know, if you I mentioned before my product innovations, longtime program in the Company, winding the division. And, you know, I think it is low, very well assimilated into the Company itself. They did very well in the quarter, and you know, I think we are all actually awaiting for it to accelerate into the quarter, only for that quarter, and it is our intention to you know really triple cross the things. Starting in Q1, we have a new compensation structure for the rest of the BEA sales rep that pushes product in the market place. The product is doing very-well while we have released, a new release of the product across all the country line in the quarter itself. And we expect to actually add more technology into it coming into this quarter. So this will be the year to watch best offerings in the Q1. So I will be able to refresh you more, once the new component gets kicked in the place now, and see how this is going to do and accelerate in Q2 going forward. But they did quite well, you know, in the last quarter.

Q - John Rizzuto

Okay, thank you very much. Good quarter guys.

A - Alfred Chuang

Thanks.

Operator

Your next question comes from the line of Katherine Egbert with Jefferies & Company.

Q - Katherine Egbert

Hi, good afternoon. My question is on the telecommunications platform. Alfred you made a few questions about that, probably, could you give us an update, or further little more color on how that performed in this quarter?

A - Alfred Chuang

Hi Katherine, the communication platform is very complicated product as you will imagine. And that product enables, really two set of things right now. One, finalizing how people are using, you know, IP-based technology for VoIP, Video and other things, that are convergent, you know for the Telco. The other technology is really gatekeeper technology that is allowing people to integrate multiple services from the outside that is appearing on people's mobile phone or at home services. We saw significant traction on going into the quarter, and with both the WIA and the non-WIA providers. And these project have very long cycle, you know the customer have to develop, you know, very sophisticated product on them, offering them literally changing the way that, you know, we work, you know, one of our customers is building a very interesting, you know set-top box technology that is delivering you know liberally on 100 megabit performance directly on to the VAR of your house, and giving, you know multimedia technology, television set replacing what we view that portal on a computers today. So those technology would be rolled out, you know in the second half of this year. And those obviously will be kind of things we will able to recognize revenue going into the second part of the year. So I think it's a little bit too early to tell, what the explosive opportunity of that will, and parallel to the other things that we are working on as we have started an effort in China that we are literally domesticating this product for the Chinese marketplace, which you know, they have close to 1.4 billion wireless subscriber SIM cards issued in the country itself. Although, we are working with one of the big Telco providers right now on a big project that they have more that 265 million subscribers more than the people who have in that country. So, I think the opportunity, if we do all the right things that is enormous out there, that it's going to take time, you know we will have to see this into the actual revenue for the company, probably, likely in the second half of this year.

Q - Katherine Egbert

Okay. And then, Mark, can you give us some details on the backlog, or in terms of deliverables that backlog is waiting on, or related to the communication platform or the refresh, some of the products, or can you give us some color on what is it waiting for?

A - Mark Dentinger

Most of that backlog is not waiting for our deliverables. Most of that backlog is relatively current and can be activated. There is a small portion of the backlog that are waiting for BEA deliverables, that much for the deliverables, but most of that is relatively current in terms of recognizable.

Q - Katherine Egbert

Okay, thanks. And then, I just wanted to be sure that, you reported in the press release that double-digit Q1 license growth. Is that consistent with your pre-announced level of 10% to 15%? Is that right?

A - Mark Dentinger

Yes, that's correct.

Q - Katherine Egbert

Okay.

A - Mark Dentinger

Between $128 million to $133 million for licenses.

Q - Katherine Egbert

Okay, thank you.

Operator

Your next question comes from the line of Sarah Friar with Goldman Sachs.

Q - Sarah Friar

Good afternoon everyone. Alfred, just on AquaLogic to go back there, I think you said 5 to 10% of license revenue in the quarter, or so around $15 million. Is that a sustainable, absolute level to kind of think of AquaLogic growing from here, or will it tend to be lumpier, or maybe at Q1 will be a less quarter than what you saw in Q4?

A - Mark Dentinger

Well, good afternoon Sarah. You know, I think Q1 is on its own, I think it's going to deal, typical seasonality during the Q1, as you know, I think it is reflected in our guidance, still, I think from a year to year perspective we have seen strong growth. I think AquaLogic component of it, it is too early to predict, we only have two quarters in our belt with the super sale in fourth quarter. And right now, the buzz is huge. And that's the only thing in the market place. You only have SOA platform just released only thing, our SOA is very high. So you know, I think, our hope is, the momentum will continue. But it is very difficult for me to predict at this point in time. As you know, the product going into the maturity, but I think that is all good news at this moment of time. So, we should see, you know the continued growth of this product.

Q - Sarah Friar

Got it. And do you include, within that, kind of thing, do you include Plumtree, the portal product. They won't call it Plumtree anymore, the portal product, is that AquaLogic, or is it kind of blended across AquaLogic, some of your older products?

A - Alfred Chuang

Well, actually the AquaLogic is more compatible. The main component actually is the WebLogic AquaLogic surface platform…..

Q - Sarah Friar

Okay.

A - Alfred Chuang

….which is the main piece. They have security component, all of them projected very well. There are components from the Plumtree staff that has gone into AquaLogic thing. And I think more of that will go into the AquaLogic over the time..

Q - Sarah Friar

And then just maybe a followup on that. Is there anything you feel, you are missing from the AquaLogic platform in most of the things going forward. Does that have any impact on you guys from a registry perspective?

A - Alfred Chuang

Yes, that would not have an impact to us, because that's more on the management side. And with respect to that, you know, decided, I think, you know, from many, discussion that we do not want to, you know, participate, you know, we have some great partners, you know especially with mercury interactive which is a great partner with BEA. Our pack ratio was extremely high with mercury in the market place. So it's something that we decided that, to let them go into the market place, and we infringe into the market place there already are in anyway.

Q - Sarah Friar

Got it.

A - Alfred Chuang

But the other step, obviously, you know, because of the buzz we have got, I think once you are touching in the business process area, there are many opportunities for us to, you know, we are building a lot of stuff on our own. And often, we will be honest with you, we will be buying more of those, and we continue to get more inertia, a lot of that is also stem from winning more people, winning more cookies in the Company. And we are, you know, in the process of hiring a lot more engineer from the Company itself. So, we are looking great acquisitions that will contribute to, we did the (indiscernible) acquisition in the second half of the year. I think that momentum probably will continue.

Q - Sarah Friar

Okay, that's helpful. And then just one final question regarding AquaLogic. But I do think SOA is a big deal right now. When you go into a customer, you find that they are drawn in because they are starting in SOA strategy, they are kind of going to at you, or is it because, they are looking for portal, and then pulling obviously the high end of the BPM. You know, what is kind of the lead into the majority of customers?

A - Alfred Chuang

That's a good question. Everyone is doing SOA, so from a year everyone is talking about SOA. I think that was the major transition. And I think that has to do with, you know, they have some life, obviously bringing back put back into the direct IP spending again. You know, people want to do things right. And I think architecture, IP architecture is sort of a 5 to 10 year, cyclical kind of thing that comes back into life, because just saw much of that, and this is the time that people coming and in terms of that they have to do things in a very architectural performing manner. And I think, you know, once you have the energy going, people want to do things right. And I think, it's not coming from one angle, or you know, they need a portal or they need a PCM technology, they need some integration with, you know a more generic upon that kind of architecture. But really people are grapping back and say "Well, I do have a lot of asset, I want to go the composite applications and models. What should I do?" I would have so much to clarify going forward, although I clear it up on what model, our programming shall go forward with. Well, I think there are more people that are using SOA to build stuffs, then they integrate stuff at this point in time, which is very, very encouraging thing to see.

Q - Sarah Friar

Yeah, I think that's very healthy. Mark, just one final question for you, just around DSOs. Could you give me a guidance number for FAS 123R in Q1. could you give it again this?

A - Mark Dentinger

You know, what I did Sarah was, GAAP operating margin remains in Q1. all of the differences are from a non-GAAP and GAAP. From non-GAAP range, it's 17% to 18%, and with GAAP range with 10 to 11%. And most of that increase in that difference is due to cash flow in Q4.

Q - Sarah Friar

Great, that's helpful. Thanks a lot.

Alfred Chuang, Chairman and Chief Executive Officer

Operator, we will take one more question please?

Operator

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

Q - Heather Bellini

Hi, thank you. Alfred, I was just wondering, I get a lot of questions from people, given how strong the quarter was. How, if you could give us an idea of how much license contribution came from Plumtree. So, for those people who think maybe a lot of the growth was inorganic versus organic. Maybe you can help, shed some light on that. And then the other question, I guess, this is both for you and Mark, in terms of margin expansion. And elaborating, I know you had talked a little bit about this to Adam's question. But let me look out over this year, do you still think when you talk to me last year, you talked about that's kind of a 100 basis points of margin level expansion, that's being reasonable on a year-over-year basis. Do you still see that as a reasonable target? That's thank you.

A - Alfred Chuang

But, let me answer the first part of the question. I will let Mark jump into the other questions you had. You know, Plumtree was not matured in our total license revenue for the quarter. It contributed to, you know, less than half of, you know, what I talked about it was the AquaLogic revenue, so that would give some idea of the range. So it's a single digit million kind of contribution, so it's not a huge deal. If they carry on this momentum, but as I said, you know, we really have put in the compound that the led to BEA, you know, bigger sales force for the market place, that's you know we have done that a lot. So this will be the year to watch and see how that Plumtree line fully integrated in the rest of BEA, its contribution to AquaLogic, and also you know, how the sales force can be pushing in the market places. So all the times are good. So if you are calibrating to look at, you know, what really had delivered a spectacular quarter, in any count, I think that included all organic growth WebLogic is not just not out there in the market place, AquaLogic, it's, you know, it just really had done very well. You know our Portal technology really you know, AquaLogic portal has been to our integration technology. It was sold very well, so all of the BEA starts really have contributed to the quarter.

Q - Heather Bellini

Okay, great. And then on the margin leverage; and actually it's just a followup on M&A as you said, if you are likely to buy more. Is there a kind of an idea, are these deals more similar to Plumtree, or these deals were, you know, you could be stepping into larger acquisitions than you do in the past?

A - Alfred Chuang

Heather, I will tell you, we are keeping our options open as you see this kind of balance sheet. We have a lot of flexibility. And you know, just like flexible, we have on the convertible note that we decide to basically stay there. I think from a acquisition perspective, that we have choices, I think at the right time, you know, I think for my condition, I think a larger deal on behalf of BEA, even though I think those are hard to do in the software industry in general, I think when we go from some challenges in the market place right now with some of those new launch deals are being assembled. That was redundant for the last year. But I think, it's possible. You know, BEA had been from very large deals over, you know, 12 year history. And I will not be totally surprised we are able to actually do one. I don't have one lineup right now. We do, but I think, most likely there will be smaller deal to come for the country side, you know that we will be doing.

Q - Heather Bellini

Great. And then just on the margin question, and thank you for your time.

A - Mark Dentinger

Heather Bellini, this is Mark. Just on the margin question, we previously alluded to the fact that the business model inherently has margin expansion with possibilities in it. It's a very, very healthy, and very robust business model, you can see it from our financial results. Currently, the basic redistribution of the management is that, if we can invest in areas, we could generate double-digit license revenue growth. Our previous decision now is to invest in those areas, more than it is to drop more into the margins. If on the other hand, we saw flat scenarios, our disposition might change. But as you can see right now, we are prowling a lot of money back into the basic operations of the business, in essence chasing license revenue growth. And I think that's our mind set until business conditions change.

Q - Heather Bellini

And any commentary on what we should expect for margin expansion for this fiscal year?

A - Mark Dentinger

We don’t give any specific guidance for the year on margins or margin expansions, we do expect standard in the quarter, expansion of margins as we go through as you know we have cyclical nature of the license delivery for the margin should naturally on the rolling expand inside the year as we get further out. As we further out, and as we completely integrate Plumtree. But beyond that, it will be more of business decisions we make at the year of those line.

Q - Heather Bellini

Okay, great, thank you.

Alfred Chuang, Chairman and Chief Executive Officer

Well, I want to thank everyone for spending the time with the call. And for growth in the year, I want to thank all of the employees of BEA who has done a very good job throughout the year and delivered spectacular results. Clearly, you know, I think we have shown the world that we can beat the competition, we have gained market share. And you know we won numerous, numerous competitions in this quarter and in the last few quarters. And one other reminder is, before I get off the call that is our Financial Analyst Day, this year will be on March 21st in San Francisco. For Financial Analyst Community, please take the date. With that, I want to thank you again for listening to our Fourth Quarter and our Fiscal Year Earnings Call, and I look forward to talking to all of you in the next quarter. Bye-bye.

Operator

This concludes today's conference call. You may now disconnect.

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Source: BEA Systems F4Q06 (Qtr Ending Jan 31, 2006) Earnings Conference Call Transcript (BEAS)
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