BEA SYSTEMS from Briefing.com

Story Stocks Updated: 25-Feb-05

Quotes at time of story, top stories today:(BEAS 15:12) (MFE 10:24)

Feb 25, 3:12pm ETBEA Systems (BEAS) $8.27 0.05 (0.60%) BEA Systems reported all time record revenue and all time record earnings for fiscal 2005, but the stock is down today. Since setting record revenue and earnings should be what a growth stock does every quarter, what's wrong at BEA Systems? Well, nothing goes up forever and when a stock does reach the top, by definition, the revenues and earnings are all-time records. That's what "the top" means. BEAS is down because all of the typical signs of the end of the road for BEA's strong growth pattern is near. The best dashboard measurement of how well a software company with a traditional business model is growing is the trend in license revenues compared to maintenance revenues. Rising license revenues means new customers are still being added.. Rising maintenance revenues simply means that the installed base of customers is continuing to pay their ongoing maintenance fees (for support and upgrades). When the total license revenue begins a clear pattern of decline, it mean that the company is not signing up new customers at the rate they used to. While This is the pattern at BEA. License revenues have shown a clear downward trend for three full years now. In fact, the 2005 Q4 license revenue of $131.8 million is lower than the two-year ago license revenue of $134.6 million (2003 Q4, ended January 31, 2003). So, if you combine the perspective of license sales being the best indicator of real growth, it is hard to say that BEA Systems actually did set record revenues. Total revenue may have been a record, but with new license sales still showing their long term declining trend, it is hard to view BEAS as a growth stock. If you also add to the picture the fact that there was no new customer deal greater than $5 million in size, a real contrast to years past when BEAS used to deliver several new $5 million or high deals routinely. The inability to sign major new customers to big deal clients implies the scariest possible scenario for any software company: can it be that all possible customers are now actual customers? When that happens for a software company, it spells doom for the stock. While the underlying fundamentals of a maturing software company are still that of a pretty good cash cow, especially if management decides to really milk the maintenance revenue stream, the valuations of a mature cash cow are so much lower than that of a growth stock, that the actual price decline in the stock is severe. Especially if the cash cow does not pay a dividend. That's the story of BEAS for the past two years - and last night's 05Q4 earnings report simply reinforces the idea that markets for BEA products have matured. Many analysts felt that this quarter would be the one that marked BEA Systems "turnaround" and a return to strong revenue and earnings growth. Now, after the conference call, many analysts are saying that "mid-summer" is when BEA's revitalization of strong growth will occur, as the new product for the VOIP telecom product is rolled out. We don't view that market as robust either, and may never reach the powerful growth stage some expect. If you believe, as we strongly do, that the markets for enterprise software in general are maturing, and combine that with the idea that the telecommunications software market is consolidating, you get a picture of BEA Systems as reaching the eventual total fulfillment of their business promise. Record revenues always happen at "the top." None of this means the company is in any kind of financial difficulties. It just means that multiple contraction is probably going to continue, making BEAS a pretty unappealing stock. All of these reasons are why the stock is down today - and probably will continue to slowly decline over the coming months. Robert V. Green