BEA has finally taken the wraps off the numbers for four of the past five quarters and reported that profitability is better than expected.
The company’s Q3 2008 income was $56m, up 59% over a year ago, against revenues of $384.4m, which represented an 11% gain.
We have seen very significant profitability improvements over the past few quarters that were not visible to Wall Street investors, said CEO Alfred Chuang. Q3 net income per share was $0.14, double that of Q1, and significantly north of the $0.01 levels for all of the previous fiscal year
BEA’s reporting of results came after nine months of silence as it was restating numbers to adjust for five quarters of options irregularities. And it came in the wake of pressure from activist Carl Icahn to force a sale after a year of depressed share prices that rose only in the wake of the spurned $17/share offer from Oracle.
On Wednesday, Oracle CEO Larry Ellison said that his firm was walking away from its $17/share offer, and that if it returned, the price would be lower.
Admittedly, BEA’s numbers were not current. It only reported through the quarter that ended on July 31, but it provided guidance for the quarter just concluded. The numbers beat BEA’s own projections, with $0.19 earnings per share that were 36% above plan. And based on BEA’s own Q4 projections of $420m to $434m revenues and margins of 27% to 28%, it predicts that FY 08 could finish with earnings of $0.70 per share. That would be 23% over First Call estimates.
The cloud in the silver lining is that overall license growth remains fairly flat, at $134.8m, which is actually 1% lower than a year ago. The company said that it expects that license growth will turn positive in Q4 and into FY 09.
But CEO Chuang said that the sales pipeline going into Q4 (which actually concluded October 31) was solid, spurred primarily by growth in Asia/Pacific. Offsetting that growth, half of BEA’s revenues are still from the Americas.
As in previous quarters back in FY 2007 when BEA was reporting, it pointed to the AquaLogic product line as the prime growth engine, which now accounts for over a quarter of all license sales. They also pointed to two recently-introduced WebLogic offerings, including the new Virtual and Communications Editions, are also likely to be growth spots.
During the Q&A session at the end of the earnings call, BEA executives were asked how they based their $21/share valuations. William M. Klein, vice president of business planning and development, responded that multiple models of they types that would be routinely employed in an acquisition scenarios were used. But he added that at least one of them, which analyzed the synergy of two companies, pointed to even higher $26 – 27/share figures when Oracle was specifically factored in.
Ahead of the earnings call, BEA share prices declined 4% to $16.70, while Oracle’s fell 1.9% to $20.42.
Our View
To paraphrase an old Monty Python line, BEA’s not dead yet. The street had a full day of trading to anticipate the earnings call and wasn’t very bullish. The results reported today show that Q4 wasn’t a sudden outlier, as the bulk of the margins increase happened in Q2, when earnings went up to $0.12 per share. The Q3 numbers revealed that the sudden jump in Q2 wasn’t necessarily a fluke.
Besides Carl Icahn and Larry Ellison, the obvious gorilla in the room is new license shares, which have not ridden the growth wave with profitability. The results show that BEA’s attention over the past year was obviously on getting its own house in order, and not just over the earnings restatements. The company didn’t have to prove that it made product, but that it could make money.
That said, nobody expects yesterday’s results to settle questions over BEA’s long term prospects. Although Oracle’s Ellison has backtracked in the past, such as when company president Charles Philips contradicted Ellison’s assertion that Oracle would kill the PeopleSoft product line once it acquired it, we don’t except that Ellison’s to get hung up on matters of pride when it comes to low ball threats.
We expect that today (Friday), Ellison will trash talk the results, especially in two areas: flat license sales, and FY09 guidance, which he will contend is overoptimistic given that half of BEA’s business remains in its slowest world region. But given that BEA’s shares closed barely 3% under Oracle’s $17 offer prior to the better-than-expected earnings call, we expect that at some point Oracle will discreetly return to the table.
